Woerner v. Bankers Life & Casualty Co.

Citations: 216 F. Supp. 3d 924; 2016 U.S. Dist. LEXIS 148825; 2016 WL 6277468Docket: No. 16 C 5296

Court: District Court, N.D. Illinois; October 27, 2016; Federal District Court

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Joseph Woerner, an insurance agent for Bankers Life and Casualty Company, claims his hiring was part of a pyramid scheme designed to exploit new agents through excessive fees and unjust commission clawbacks. He asserts that Bankers Life violated his agency contract (Count I), breached the covenant of good faith and fair dealing under Illinois law (Count II), and violated the Illinois Consumer Fraud Act (Count III). Bankers Life filed a motion to dismiss these claims under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. The legal standard for such a motion requires a complaint to provide a clear statement of the claim that shows entitlement to relief, offering the defendant fair notice of the claims. The complaint must contain factual content that allows for reasonable inferences of liability, rather than mere labels or formulaic recitations of legal elements.

Woerner, a Virginia resident, signed a standard agent contract with Bankers Life in October 2014, which stipulates compensation through commissions and grants Bankers Life authority to reject applications without cause. The contract also mandates that agents return commissions on refunded premiums and permits Bankers Life to deduct such chargebacks from future earnings. Woerner alleges that the business model necessitates hiring more agents than needed, leading to high turnover rates among agents. The court ultimately denied Bankers Life's motion to dismiss in part and granted it in part.

Bankers Life imposes non-refundable fees on new agents, including licensing and list fees, totaling hundreds of dollars, and requires a $300 charge for a 'holdback' account used for chargebacks. Woerner alleges that senior agents commonly 're-write' policies sold by former agents to justify commission chargebacks and reassign renewal commissions unjustly. These 'rewrites' involve only minor changes, such as policy name alterations, allowing Bankers Life to demand commission repayments from former agents without legitimate justification. The form letters sent to former agents cite vague potential reasons for chargebacks, none of which Woerner deems valid under the Agent Contract, arguing that a premium refund is the only acceptable basis for chargebacks. Woerner claims his agency agreement was terminated after he refused to participate in the 're-write' process, subsequently receiving a request for $473.96 in commissions without specific policy details. His attempts to obtain a clear accounting resulted in an incomprehensible log. The amount owed later increased to $696.58, leading to a collection notice. Woerner's complaint includes similar grievances from other former agents. He asserts that Bankers Life breached the Agent Contract by seeking chargebacks on policies without returned premiums and charging new agent fees. Bankers Life concedes that improper chargebacks could constitute a valid claim but argues Woerner has failed to provide sufficient details about the legitimacy of the charges. However, Woerner contends it is unreasonable to expect him to prove the charges' validity given that only Bankers Life possesses the relevant evidence. The Seventh Circuit supports the notion that plaintiffs are not held to stringent pleading standards when evidence is within the defendant's control, applicable here under the lower standard of Rule 8.

Bankers Life holds sufficient evidence to evaluate the merits of Woerner's claims, meaning his lack of specific factual allegations does not warrant dismissal at this stage. Woerner's failure to definitively prove the chargebacks against him are unjustified does not negate the plausibility of his breach of contract claim. The complaint must suggest a valid claim with a non-negligible probability, which does not equate to certainty. Woerner's allegations that Bankers Life instructed him to "re-write" policies to force former agents to repay commissions, characterized as a common practice, provide a plausible basis for inferring a breach of the Agent Contract.

Conversely, Woerner's claims regarding non-refundable fees for licensing and holdback accounts lack sufficient explanation of how these charges breach the Agent Contract. The contract explicitly requires agents to pay for renewal licensing fees, and an addendum allows for the withholding of commissions to create a holdback account for chargebacks. Although Woerner did not reference an additional agreement related to marketing fees, the court cannot rely on it due to its absence in the complaint. Woerner fails to demonstrate how listing fees violate the Agent Contract, leading to the dismissal of that part of his claim.

Regarding the breach of the covenant of good faith and fair dealing, Woerner asserts that Bankers Life must exercise its discretion fairly when determining chargebacks. However, Illinois courts maintain that the covenant does not typically support a tort claim for its breach.

The covenant of good faith and fair dealing is not recognized as an independent source of tort duties but serves as a tool to interpret the intentions of contracting parties. All contracts inherently imply good faith and fair dealing, and when faced with two conflicting interpretations, the one that does not suggest bad faith should be preferred. In Illinois, an independent cause of action for breach of this covenant has been acknowledged mainly in the specific context of insurance companies settling claims, where the insurer's interests may conflict with the insured's. In Woerner's case, he has not asserted a breach of this covenant separate from his breach of contract claim. If Bankers Life has discretion regarding chargebacks, it must exercise that discretion in good faith. Any determination of Bankers Life's good faith would hinge on the same evidence indicating a breach of contract. Therefore, any unfair action by Bankers Life regarding the chargeback would also constitute a breach of contract, leaving no need for a separate tort remedy, which Woerner has not substantiated with case law. His claims for breach of contract and breach of the covenant are essentially the same, leading to the dismissal of the latter.

Additionally, Woerner's allegation that Bankers Life engages in pyramid schemes under the Illinois Consumer Fraud Act fails due to insufficient connection to Illinois. The Illinois Supreme Court allows non-resident plaintiffs to pursue claims under this Act only if the relevant transaction occurs primarily in Illinois. Woerner, being a non-Illinois resident, has not demonstrated such a connection, akin to the case of Avery, where the majority of circumstances related to the claims occurred outside Illinois.

The Illinois Supreme Court supports the application of the Consumer Fraud Act under specific conditions: contracts with deceptive statements must be executed in Illinois, the defendant's principal business must be in Illinois, and the contracts must include choice-of-law and forum-selection clauses designating Illinois law for litigation. Additionally, complaints about the defendant's performance should be directed to its Chicago office, and payments for services must also be sent there. Woerner's claims against Bankers Life, alleging a pyramid scheme in violation of the Consumer Fraud Act, fail to meet these criteria. Although he asserts the scheme was based in Illinois, the court finds his allegations lack sufficient evidence that fraudulent conduct occurred within the state. Courts have previously ruled that simply claiming a fraudulent scheme originated from Illinois is inadequate for applying the Consumer Fraud Act to out-of-state residents. Furthermore, Woerner's argument that deceptive policies were developed in Illinois does not establish a necessary connection. His claims also do not sufficiently articulate a pyramid scheme under the Act's definition, as he fails to demonstrate that commissions arise from customer payments linked to policy rewrites. The lack of necessary allegations regarding policyholder payments and the implausibility of his claims undermine his position.

Woerner alleges that "re-writing" policies allows current agents to take commissions from former agents but does not establish how this practice benefits Bankers Life or generates additional revenue, failing to support a plausible pyramid scheme claim. Woerner's assertion that Bankers Life's model relies on hiring more agents than necessary to profit from new agent fees also lacks the necessary elements for a pyramid scheme, as the agents do not benefit from recruiting others—new agents undermine former agents' commissions. The Consumer Fraud Act requires that both recruiters and recruits be part of the same scheme, which Woerner's allegations do not support due to the misalignment of incentives between Bankers Life and its agents. Consequently, Count III is dismissed. The court denies Bankers Life's motion regarding Count I's charge-back allegations but grants it concerning fees, Count II, and Count III, dismissing them without prejudice. Woerner may file a motion to amend his complaint by December 2, 2016, if he believes he can address the deficiencies noted. Additionally, Bankers Life's Agent Manual, potentially incorporated into the Agent Contract, may provide grounds for chargebacks under specific circumstances outlined in the manual, such as commission refunds or unearned advanced commissions due to policy cancellations or downgrades.

Bankers Life has not contested the dismissal of Woerner's breach of contract claim regarding impermissible chargebacks. Even if the Agent Manual is deemed part of the Agent Contract, the Court would not dismiss Woerner’s claim at this stage. He has adequately alleged that Bankers Life engages in impermissible chargebacks affecting his commissions. The legitimacy of these chargebacks cannot be assessed without knowing the specific policies involved, information only Bankers Life possesses. Regarding Woerner's Consumer Fraud Act claim, Bankers Life argues for its dismissal on the grounds that Woerner is not a 'consumer.' However, the Act protects not only consumers but also borrowers and business persons. Courts recognize claims under the Act for both consumers and non-consumers who have suffered damages from market-directed conduct. While it remains uncertain if Woerner qualifies to bring a claim under the Act, the absence of relevant authority in the parties' arguments prevents the Court from making a determination at this time.