Ryerson Inc. v. Federal Insurance Company

In the
United States Court of Appeals
For the Seventh Circuit
No. 10-3522
RYERSON INC.,
Plaintiff-Appellant,
v.
FEDERAL INSURANCE COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 09 C 4173—Elaine E. Bucklo, Judge.
ARGUED FEBRUARY 16, 2012—DECIDED APRIL 12, 2012
Before POSNER, RIPPLE, and WILLIAMS, Circuit Judges.
POSNER, Circuit Judge. This diversity suit, governed by
Illinois law because filed in a district court located in
that state and neither party argued choice of law, Santa’s
Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d
339, 345 (7th Cir. 2010), pits an insured, Ryerson, against
its liability insurer, Federal Insurance Company. The
district court granted summary judgment in favor of
the insurance company.

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2 No. 10-3522
In 1998 Ryerson (actually a predecessor, but we can
disregard that detail) sold a group of subsidiaries to
EMC Group, Inc. for $29 million. The following year
EMC sued Ryerson, seeking rescission of the sale and
restitution of the purchase price. The ground was that
Ryerson had concealed an ominous impending develop-
ment affecting one of the subsidiaries: the subsidiary’s
largest customer had declared that unless it slashed its
prices the customer would build its own plant and stop
buying from the subsidiary. The customer repeated the
demand for a price cut to EMC when EMC acquired
the subsidiary from Ryerson; and when EMC failed to
accede to the demand, the customer, as it had threatened
to do, took its business elsewhere. EMC’s suit charged
Ryerson with fraudulent concealment intended to
induce EMC to buy the subsidiary, breach of contract
(the contract for the sale of the subsidiaries), and breach
of warranty (violation of assurances that Ryerson had
given EMC in the contract of sale).
Federal Insurance Company had issued Ryerson an
“Executive Protection Policy,” a liability insurance
policy that required Federal both to indemnify it for
judgment and settlement costs, and to reimburse it for
defense costs, reasonably incurred by Ryerson in suits
arising from risks covered by the policy. Federal
refused Ryerson’s demand for reimbursement of defense
costs, on the ground that EMC’s claim against Ryerson
was not a covered risk.
Three years into EMC’s suit against Ryerson, the
parties settled, with Ryerson agreeing to make “a post-

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No. 10-3522 3
closing price adjustment” of $8.5 million “reflecting a
change in the purchase price paid by EMC to Ryerson
for the purchase” of the subsidiary that had gotten
into trouble with its customer. (Ryerson reported this
as a “selling price adjustment” on its Form 10-K.) The
settlement thus gave EMC a partial refund of the price
it had paid for the subsidiaries. With Federal adhering
to its position that EMC’s claim against Ryerson was not
a covered risk, and thus refusing to indemnify Ryerson
for the cost of the settlement, Ryerson brought this suit
for a declaratory judgment that Federal’s insurance
policy covered the $8.5 million that Ryerson had
refunded to EMC to settle the latter’s suit.
The insurance policy covers “all LOSS for which [the
insured] becomes legally obligated to pay on account of
any CLAIM . . . for a WRONGFUL Act [elsewhere defined
in the policy to include a ‘misleading statement’ or ‘omis-
sion’] . . . allegedly committed by” the insured. Federal
denies that “loss” includes restitution paid by an insured,
as distinct from damages, which are expressly denoted
in the policy as a covered loss. Federal is right; for other-
wise fraud would be encouraged. Ryerson received
$29 million from EMC for the subsidiaries, and agreed
to give back $8.5 million to settle EMC’s fraud claims
against it. The refund represented a return of part or
maybe all of the profit that Ryerson had obtained by
inducing EMC to overpay. If Ryerson can obtain reim-
bursement of that amount from the insurance company,
it will have gotten away with fraud. It will get to keep
$29 million ($20.5 from EMC after the settlement and
$8.5 million from Federal) even though, if EMC’s claim

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4 No. 10-3522
that Ryerson agreed to settle was not completely
meritless, some portion of the $29 million was proceeds
of fraud.
If disgorging such proceeds is included within the
policy’s definition of “loss,” thieves could buy insurance
against having to return money they stole. No one
writes such insurance. See Scottsdale Indemnity Co. v.
Village of Crestwood, No. 11-2385, 2012 WL 769730, at *3, *5
(7th Cir. March 12, 2012) (Illinois law); Federal Ins. Co. v.
Arthur Andersen LLP, 522 F.3d 740, 743-44 (7th Cir.
2008) (ditto); Mortenson v. National Union Fire Ins. Co.,
249 F.3d 667, 671-72 (7th Cir. 2001) (ditto), and no state
would enforce such an insurance policy if it were writ-
ten. Id. at 672; Level 3 Communications, Inc. v. Federal
Ins. Co., 272 F.3d 908, 910 (7th Cir. 2001). You can’t, at
least for insurance purposes, sustain a “loss” of some-
thing you don’t (or shouldn’t) have. Id.; In re
TransTexas Gas Corp., 597 F.3d 298, 308-11 (5th Cir. 2010);
Safeway Stores, Inc. v. National Union Fire Ins. Co., 64
F.3d 1282, 1286 (9th Cir. 1995). And so there is no
insurable interest in the proceeds of a fraud. Cf. Grigsby
v. Russell, 222 U.S. 149, 154-55 (1911) (Holmes, J.);
3 Couch on Insurance §§ 41:3, 42:57, pp. 41-12, 42-96 (3d
ed. 2011).
Whether a claim for restitution is based on fraud or
on some other deliberate tortious or criminal act, or at
the other extreme of the restitution spectrum merely
on an innocent mistake or the rendition of a service
for which compensation is expected but contracting is
infeasible (as when a physician ministers to a person
who collapses unconscious on the street); and whether

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No. 10-3522 5
the plaintiff is seeking the return of property or the
profits that the defendant made from appropriating it, a
claim for restitution is a claim that the defendant has
something that belongs of right not to him but to the
plaintiff. Tull v. United States, 481 U.S. 412, 424 (1987);
ConFold Pacific, Inc. v. Polaris Industries, Inc., 433 F.3d 952,
957-58 (7th Cir. 2006); Braunstein v. McCabe, 571 F.3d 108,
122 (1st Cir. 2009); Restatement (Third) of Restitution &
Unjust Enrichment § 1, comment c (2011); 1 Dan B. Dobbs,
Law of Remedies § 4.1(1), pp. 550-54 (2d ed. 1993). A
claim for “damages” in the proper sense of the word is
different. If a car driven negligently hits and injures a
pedestrian, the pedestrian will sue the driver for the
monetary equivalent of the harm done to him, not for
the “profit” that the accident generated for the driver.
It generated no profit; it gave him nothing.
EMC restyled its claim against Ryerson as one for
damages after it sold the subsidiary (thereby mooting
its claim to unwind the purchase). But the label isn’t
important. Level 3 Communications, Inc. v. Federal Ins. Co.,
supra, 272 F.3d at 910-11; Pan Pacific Retail Properties, Inc.
v. Gulf Ins. Co., 471 F.3d 961, 966-69 (9th Cir. 2006);
Unified Western Grocers, Inc. v. Twin City Fire Ins. Co., 457
F.3d 1106, 1115 (9th Cir. 2006). EMC was seeking to
recover a profit made at its expense by Ryerson’s
fraud, which means that if the insurance company were
liable to Ryerson, Ryerson would get to keep profits
of fraud. Having to surrender those profits was not a
“loss” to Ryerson within the meaning of the insurance
policy, as we held in the nearly identical case of Level 3
Communications, Inc. v. Federal Ins. Co., supra, 272 F.3d at

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6 No. 10-3522
910; see also St. Paul Fire & Marine Ins. Co. v. Village of
Franklin Park, 523 F.3d 754, 756-57 (7th Cir. 2008); In re
TransTexas Gas Corp., supra, 597 F.3d at 310; Republic
Western Ins. Co. v. Spierer, Woodward, Willens, Denis &
Furstman, 68 F.3d 347, 351-52 (9th Cir. 1995); Bank of the
West v. Superior Court, 833 P.2d 545, 553 (Cal. 1992).
A judgment or settlement in a fraud case could
involve a combination of restitution and damages, and
then the insurance company would be liable for the
damages portion in accordance with the allocation
formula in the policy. Pan Pacific Retail Properties, Inc. v.
Gulf Ins. Co., supra, 471 F.3d at 967-69; Unified Western
Grocers, Inc. v. Twin City Fire Ins. Co., supra, 457 F.3d at
1114-16. EMC’s complaint against Ryerson demanded
“restitution of the monies paid for [the subsidiary] . . .
including transaction costs.” Reimbursing EMC’s trans-
action costs would not be restitution because Ryerson
gained nothing from the money that EMC paid
its lawyers and accountants to handle the acquisition.
But Ryerson’s lawyer concedes that his client made no
effort to allocate its loss between the loss of ill-gotten
gains and other costs, so any claim to those costs has
been forfeited.
Ryerson has, however, another ground of appeal. When
it first asked Federal Insurance Company to cover the
$29 million “loss,” Federal refused on grounds that it
no longer asserts, not on the “no loss” ground that
it prevailed on in the district court and that convinces
us as well. Ryerson argues that Federal’s change of
position violates the doctrine of “mend the hold,” which

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No. 10-3522 7
forbids the defendant in a breach of contract suit (which
Ryerson’s suit against Federal is—a suit charging breach
of the insurance contract) to change its defenses, at least
without a good reason to do so, see Herremans v. Carrera
Designs, Inc., 157 F.3d 1118, 1123 (7th Cir. 1998), in the
midst of the suit. Schuyler County v. Missouri Bridge & Iron
Co., 100 N.E. 239, 240 (Ill. 1912); Horwitz-Matthews, Inc. v.
City of Chicago, 78 F.3d 1248, 1251-52 (7th Cir. 1996) (Illinois
law); First Commodity Traders, Inc. v. Heinold Commodities,
Inc., 766 F.2d 1007, 1013 (7th Cir. 1985) (ditto); cf. Harbor
Ins. Co. v. Continental Bank Corp., 922 F.2d 357, 362-64 (7th
Cir. 1990) (ditto); Robert H. Sitkoff, Comment, “ ‘Mend the
Hold’ and Erie: Why an Obscure Contracts Doctrine
Should Control in Federal Diversity Cases,” 65 U. Chi.
L. Rev. 1059 (1998).
But at least as understood in Illinois, mend the hold
does not forbid the defendant to add a defense after being
sued; that is, it does not confine him to the defense (or
defenses) that he announced before the suit. To require a
potential defendant to commit irrevocably to defenses
before he is sued would be unreasonable to the point of
absurdity. Until he receives and reads the complaint
he cannot have a clear idea of how best to defend. He
shouldn’t be put to the expense of having to identify
and articulate all possible legal defenses to a suit unless
and until there is a suit. The only lasting effect of the
expansive interpretation of the doctrine urged by Ryerson
would be that insurance companies would refuse to offer
any explanation for denying coverage until the insured
sued—as Federal would have been entitled to do, First
Commodity Traders, Inc. v. Heinold Commodities, Inc., supra,

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8 No. 10-3522
766 F.2d at 1013—leaving insureds to speculate on the
grounds for denial and thus precipitating lawsuits many
of which would prove groundless.
And finally Federal’s change of defenses could not
have harmed Ryerson, because in denying coverage
Federal told Ryerson it was reserving the right to add
supplemental grounds for the denial. Compare Progres-
sive Ins. Co. v. Brown ex rel. Brown, 966 A.2d 666, 668-69
(Vt. 2008). When there is no prejudice to the
opposing party, invoking the doctrine of mend the hold
to bar a valid defense is overkill. See Trossman v.
Philipsborn, 869 N.E.2d 1147, 1166-67 (Ill. App. 2007);
Larson v. Johnson, 116 N.E.2d 187, 191-92 (Ill. App. 1953);
cf. New Hampshire v. Maine, 532 U.S. 742, 750-51 (2001).
AFFIRMED.
4-12-12

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