Zurich American Insurance Com v. Ocwen Financial Corporation

In the

United States Court of Appeals For the Seventh Circuit ____________________

No. 19-3052 ZURICH AMERICAN INSURANCE COMPANY, et al., Plaintiffs-Appellees,

v.

OCWEN FINANCIAL CORPORATION, et al., Defendants-Appellants. ____________________

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 17 C 2873 — Charles P. Kocoras, Judge. ____________________

ARGUED OCTOBER 26, 2020 — DECIDED MARCH 12, 2021 ____________________

Before EASTERBROOK, ROVNER, and WOOD, Circuit Judges. WOOD, Circuit Judge. Thanks to the diversity jurisdiction, federal courts are often asked to decide questions of insurance coverage; state law almost always provides the rule of deci- sion in such cases. This is one of them. Zurich American In- surance sold a policy to Ocwen Financial, a debt-collection company. After a disgruntled consumer sued Ocwen, it ten- dered the dispute to Zurich, but Zurich asserted that policy

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exclusions relieved it of any duty to defend. Zurich then asked a federal court to decide whether this was indeed the case. The district court issued a judgment declaring that Zur- ich had no duty to defend Ocwen in the underlying litigation, and Ocwen has appealed. We agree with the district court’s reading of the policy and therefore affirm. I At the time this suit was filed, Ocwen was a limited liabil- ity company whose sole member was Ocwen Mortgage Ser- vicing, a company incorporated in the U.S. Virgin Islands with its principal place of business there. Zurich is incorpo- rated in New York and has its principal place of business in Illinois. Since the parties were of diverse citizenship and the amount in controversy exceeds $75,000, the district court had jurisdiction under 28 U.S.C. § 1332(a). Ocwen collects and services debts. In 2015, Tracy A. Beecroft sued Ocwen in federal court in Minnesota for its at- tempts to collect on a mortgage loan that Beecroft had dis- charged in bankruptcy. The bankruptcy discharge should have been the end of things, but it was not. To Beecroft’s dis- pleasure, Ocwen aggressively pursued her for this debt. The effects were traumatic for Beecroft: she suffered emotional and physical distress, including a stress-induced miscarriage, and she was later denied a mortgage because Ocwen wrongly reported the alleged default to credit agencies. Counts I through III of her complaint relied on the Fair Debt Collection Practices Act (FDCPA) and the Telephone Consumer Protec- tion Act (TCPA); Count IV alleged common-law defamation; and Count V alleged common-law invasion of privacy.

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II From September 2010 to September 2016, Zurich insured Ocwen under a series of commercial general liability poli- cies—a type of policy that entitles the insured to indemnifica- tion for various types of tort claims brought against it. The policies were largely identical and covered all damages caused by both “bodily injury” and “personal and advertising injury.” But two provisions in the policies expressly excluded injuries resulting from conduct that violates certain laws. The first exclusion, for “Recording and Distribution of Ma- terial or Information in Violation of Law,” precludes coverage for bodily injury and personal and advertising injury: directly or indirectly arising out of or based upon any action or omission that violates or is alleged to violate: (1) The [TCPA] … (2) The CAN-SPAM Act of 2003 [Pub. L. No. 108-187] [and amendments] … (3) The Fair Credit Reporting Act [FCRA] … includ- ing the Fair and Accurate Credit Transaction Act; or (4) Any federal, state statute, ordinance or regulation other than the TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments and additions, or any other legal liability, at common law or otherwise, that addresses, prohibits or limits the printing, dis- semination, disposal, monitoring, collecting, re- cording, use of, sending, transmitting, communi- cating or distribution of material or information.

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The second exclusion, for “Violation of Communication or In- formation Law,” is similar in scope. It excludes bodily injury, property damage, and personal and advertising injury: resulting from or arising out of any actual or alleged vio- lation of: (A) the [TCPA], [Driver’s Privacy Protection Act, or DPPA], or [CAN-SPAM Act]; or (B) any other federal, state, or local statute, regulation or ordinance that imposes liability for the: (1) Unlawful use of telephone, electronic mail, in- ternet, computer, facsimile machine or other com- munication or transmission device; or (2) Unlawful use, collection, dissemination, disclo- sure or re-disclosure of personal information of any manner

by any insured or on behalf of any insured.

Soon after Beecroft filed her suit, Ocwen asked Zurich to provide a defense pursuant to the insurance agreement. Zur- ich refused; instead, it filed this declaratory judgment action against Ocwen, arguing that the policy exclusions just noted absolved it of any duty to defend or indemnify Ocwen in the Beecroft lawsuit. See 28 U.S.C. § 2201. Ocwen counterclaimed that Zurich breached its duty to defend, and Zurich re- sponded with a motion for judgment on the pleadings. In or- der to resolve that motion, the court had to compare the pol- icy language with the allegations in Beecroft’s complaint. Beecroft’s initial complaint alleged that Ocwen frequently attempted to contact her as part of a debt-collection effort that included “letters, billing statements and repeated robocalls to

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[her] cellular phone.” She alleged that Ocwen “made approx- imately 58 phone calls to [her] cellular telephone using an au- tomated telephone dialing system.” The complaint described each of those 58 calls with specificity, including the date, time, and the caller ID. On two occasions, Beecroft picked up the phone and told Ocwen to stop calling. In her first amended complaint, Beecroft expanded the list of the collection methods to “letters, billing statements and repeated robocalls to [her] cellular and home telephone.” (Our emphasis.) Her initial and amended complaints asserted that Ocwen used an autodialer because, on the two times that Beecroft actually answered, there “was a significant delay be- fore an operator would come onto the line and ask for [her]”—an allegedly telltale sign that Ocwen was using an au- todialer before connecting her with a live operator. Beecroft’s second amended complaint added an allegation that “some or all of the call to [her] cellular phone, including but not limited to the [58] calls listed above, were made using: (a) Premier Global Dialer; (b) an IAT Predictive Dialer; (c) a Davox Dialer; (d) Aspect Dialer; or (e) similar dialing system that has the requisite capacity pursuant to the TCPA.” In each version of the complaint, Beecroft maintained that Ocwen’s actions “were done unfairly, unlawfully, intentionally, decep- tively and absent bona fide error, lawful right, legal defense, legal justification or legal excuse.” In other parts of the com- plaint, Beecroft alleged that: Ocwen and its agents intentionally and/or negligently caused emotional harm to [Beecroft] by engaging in highly offensive conduct in the course of collecting this debt, thereby invading and intruding upon [her] right to privacy. This conduct included over 58 phone calls

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to [Beecroft’s] cellular telephone and additional calls to Plaintiff’s home phone … . To similar effect, she asserted that Ocwen “intentionally and/or negligently interfered, physically or otherwise, with the solitude, seclusion and/or private concerns or affairs of this Plaintiff, namely, by repeatedly and unlawfully calling Plaintiff’s cellular telephone with equipment prohibited by federal law.” After reviewing the insurance policy and Beecroft’s com- plaint, the district court concluded that all of the factual alle- gations in Beecroft’s complaint fell within the scope of the pol- icy exclusions. To the extent that Counts I through III alleged conduct that violated the TCPA, it found that the policy ex- clusion’s “catch-all” clause swept in the FDCPA as an “other statute” that regulates the communication of information. Be- cause the FDCPA prohibits calls made with the “intent to an- noy, abuse or harass,” the court concluded that even if some of Ocwen’s calls to Beecroft did not violate the TCPA, they still violated the FDCPA because they were made after Beecroft had asked Ocwen to stop calling. Calling someone after being asked to stop, the court thought, indicated an in- tent to abuse, harass, or at the very least annoy. The court also held that the common-law claims in Counts IV and V (defa- mation and invasion of privacy) were excluded because they were based on conduct “arising out of” the same operative facts as the conduct that was alleged to have violated the enu- merated statutes.

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Based on these findings, the court held that Zurich had no duty to defend Ocwen in the Underlying Litigation.1 This ap- peal followed. Ocwen does not disagree with the district court’s analysis of Counts I through IV; it argues only that the policy exclusion should not have applied to the common-law invasion-of-privacy claim in Count V. Ocwen contends that the potential for covered liability exists because the Beecroft complaint includes the possibility that (1) some calls were made to Beecroft’s home phone using a live operator, and (2) some calls were not made with the intent to annoy, abuse, or harass. The first of these points would preclude TCPA liabil- ity, because that statute prohibits calls to landlines only if those calls use artificial or prerecorded voices. The second is designed to knock out the FDCPA theory, because that law does not cover calls that were made negligently, rather than intentionally. According to Ocwen, the Beecroft complaint potentially alleges conduct that neither falls into the enumer- ated statutes nor “arises out of” conduct that is alleged to vi- olate those statutes. We evaluate a district court’s grant of a motion for judg- ment on the pleadings de novo, viewing “the facts in the com- plaint in the light most favorable to the nonmoving party.” ProLink Holdings Corp. v. Fed. Ins. Co., 688 F.3d 828 (7th Cir. 2012); Landmark Am. Ins. Co. v. Hilger, 838 F.3d 821, 824 (7th Cir. 2016). We may affirm “only if it appears beyond doubt that [Ocwen] cannot prove any facts that would support [its]

1 Beecroft’s lawsuit was later consolidated with a class action, Keith Snyder

v. Ocwen Loan Serv. LLC, No. 1:14-cv-8461, 2019 WL 2103379 (N.D. Ill. May 14, 2019). Final judgment (based on an approved settlement) was entered on July 1, 2019.

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claim for relief.” Landmark, 838 F.3d at 824. The parties agree that Illinois law applies. III A A purchaser buys insurance to transfer risk onto an entity that is willing to bear it (for a price). Commercial general lia- bility insurance addresses the risk of tort liability: a commer- cial policyholder—the insured—sleeps easier knowing that if it should be sued in tort, the insurer will pay for its defense and, if need be, indemnify its losses. An insurer has a duty to defend its insured “unless it is clear from the face of the underlying complaint that the facts alleged do not potentially fall within the policy’s coverage.” G.M. Sign, Inc. v. State Farm Fire and Cas. Co., 18 N.E.3d 70, 77 (Ill. App. Ct. 2014) . “If any portion of the suit potentially falls within the scope of coverage, the insurer is obligated to de- fend.” Health Care Indus. Liab. Ins. Program v. Momence Mead- ows Nursing Ctr., 566 F.3d 689, 694 (7th Cir. 2009). It is “the factual allegations in the complaint, and not the legal labels a plaintiff uses,” that matter. Id. at 696. And factual allegations “are only important insofar as they point to a theory of recov- ery.” Id. (citing U.S. Fid. & Guar. v. Wilkin Insulation Co., 578 N.E.2d 926, 932 (Ill. 1991) (“[A]n insurer has a duty to defend its insured if any theory of recovery alleges potential cover- age.”)). When considering whether the facts alleged describe po- tentially covered liability, Illinois courts “liberally construe[]” the policy terms and the allegations in the complaint in the insured’s favor. Pekin Ins. Co. v. XData Sols., Inc., 958 N.E.2d 397, 400 (Ill. App. Ct. 2011). XData added that “[t]his is true

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even if the allegations are groundless, false, or fraudulent, and even if only one of several theories of recovery alleged in the complaint falls within the potential coverage of the pol- icy.” Id. Accordingly, a decision to excuse an insurer’s duty to defend based on an exclusionary clause in the contract “must be clear and free from doubt.” Evergreen Real Estate Servs., LLC v. Hanover Ins. Co., 142 N.E.3d 880, 887 (Ill. App. Ct. 2019). Reasonable disagreement about the applicability of an exclu- sion must be resolved in favor of the insured. Id. To prevail against Zurich, Ocwen needs to establish that there are factual allegations in the Beecroft complaint that the policy exclusions do not remove from coverage. Even a single covered factual allegation would suffice to trigger Zurich’s duty to defend. See Title Indus. Assurance Co. v. First Am. Title Ins. Co., 853 F.3d 876, 887 (7th Cir. 2017). Some of the language in the Zurich policy is straightfor- ward. For example, injuries resulting from violations of the TCPA, CAN-SPAM Act, and FCRA are not covered—full stop. But there is also a catch-all clause that sweeps in more. The “arising out of” language excludes the underlying con- duct that forms the basis of the violation of an enumerated law, even if liability for that underlying conduct might exist under a legal theory that is not expressly mentioned in the policy exclusion (e.g., common-law invasion of privacy). Stated differently, the “arising out of” phrase presents a “but-for” inquiry: if the plaintiff would not have been injured but for the conduct that violated an enumerated law, then the exclusion applies to all claims flowing from that underlying conduct regardless of the legal theory used. See G.M. Sign, Inc., 18 N.E.3d at 78 (“‘Arising out of’ means ‘originating

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from,’ ‘having its origin in,’ ‘growing out of,’ and ‘flowing from.’”). G.M. Sign dealt with an arrangement quite similar to the one before us. In that case, State Farm issued a liability policy that excluded injuries “arising directly or indirectly out of” con- duct that “violates or is alleged to violate” the TCPA, the CAN-SPAM Act, or any other law that regulates the commu- nication of information. Id. at 74. The insured sent unsolicited faxes and was sued for alleged TCPA violations, common-law conversion, and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act. Id. at 73. Because all three counts in the complaint referred only to the factual allegations of faxes that were also alleged to have violated the TCPA, the court held that the common-law conversion claim fell within the policy exclusion. Id. at 79; see also Mesa Labs., Inc. v. Fed. Ins. Co., 436 F. Supp. 3d 1092, 1098–99 (N.D. Ill. 2020) (“[Plain- tiff’s] common law and TCPA counts derive from ‘the very same conduct,’ namely ‘the sending of unsolicited fax adver- tisements …’ triggering the Information Exclusion.”). B With these legal standards in mind, we are ready to turn to Ocwen’s three suggested constructions of Beecroft’s com- plaint. Any of these, it argues, allows it to avoid the policy exclusions. 1 The TCPA prohibits people from initiating “any telephone call to any residential line using an artificial or prerecorded voice.” 47 U.S.C. § 227(b)(1)(B). It does not address calls that do not use artificial or prerecorded voices directed to residen- tial lines. Ocwen stitches together two components of

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Beecroft’s complaint to support an argument that it may have placed non-prohibited calls to Beecroft’s home phone. First, it points to the complaint’s description of its collection efforts, which “include[d]” calls to Beecroft’s home phone (in addi- tion to cellular calls, letters, and billing statements). Second, it cites the factual allegation in the complaint that Beecroft “an- swered approximately two calls from Ocwen,” and after an- swering the phone, “there was a significant delay before an operator would come onto the line and ask for” her. If these two sets of phone calls have any overlap, Ocwen argues, they would establish the potential for alleged behavior that does not violate the TCPA. Calls to Beecroft’s home landline using a live operator would support her common-law invasion of privacy claim while steering clear of the exclusions. 2 The TCPA also forbids making “any call … using any au- tomatic telephone dialing system [(ATDS)] or an artificial or prerecorded voice” to “any telephone number assigned to … a cellular phone service.” 47 U.S.C. § 227(b)(1)(A)(iii). A call to Beecroft’s cell phone without using an ATDS or artificial or prerecorded voices would not violate the TCPA. Ocwen finds this scenario in the complaint by flipping Beecroft’s decision to answer two phone calls on its head. Alt- hough Beecroft inferred that Ocwen was using an ATDS be- cause of the delay before an operator came on the line, Ocwen argues that this allegation of ATDS usage was “based on an assumption drawn from a limited sample size” of two out of the 58 alleged phone calls. Further, Ocwen declines to read Beecroft’s allegation that “some or all of the calls to [her] cell phone … were made using [the five specified ATDS systems]” as foreclosing the possibility that some of those calls used no

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ATDS. Because the conjunction “or” can impose an exclusive choice between “some or all,” and because “some” is not “all,” Ocwen argues that there might be a residuum of cell phone calls placed with old-fashioned manual dialing, and any such calls did not violate the TCPA. 3 Even if all that were true, though, Ocwen would still have the FDCPA to worry about. Setting aside the live-operator calls to Beecroft’s home and the manually dialed calls to her cell phone, and assuming that neither violated the TCPA, it remains true that if Ocwen caused “a telephone to ring … re- peatedly or continuously with the intent to annoy, abuse, or harass any person at that called number,” it violated the FDCPA. 15 U.S.C. § 1692d(5). The district court reasoned that because “Beecroft pleaded for the calls to stop … the FDCPA [is] applicable as Ocwen’s calls were meant to annoy or har- ass.” Zurich Am. Ins. Co. v. Ocwen Fin. Corp., 357 F. Supp. 3d 659, 672 (N.D. Ill. 2018). Ocwen insists that such an inference is erroneous. Beecroft’s complaints accuse Ocwen of “inten- tionally and/or negligently” invading her privacy. Seizing on the word “negligently,” Ocwen argues that this means that at least some calls were not made with the requisite intent for an FDCPA violation. C In Illinois civil practice, “[t]he pleader must state the facts essential to his cause of action.” Knox Coll. v. Celotex Corp., 430 N.E.2d 976, 984 (Ill. 1981). “A pleading which merely para- phrases the law, ‘as though ... to say that (the pleader’s) case will meet the legal requirements, without stating the facts,’ is insufficient.” Id. While the duty to defend is not dependent on

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a complaint’s ability to satisfy a jurisdiction’s pleading stand- ards, Illinois has harmonized the principles animating its fact- pleading rules with those guiding the duty-to-defend inquiry. When reviewing a complaint to determine whether it alleges covered liability, Illinois courts “give little weight to the legal label that characterizes the underlying allegations.” Lexmark Int'l, Inc. v. Transp. Ins. Co., 761 N.E.2d 1214, 1221 (Ill. App. Ct. 2001). Even the Federal Rules of Civil Procedure, which use the more liberal notice-pleading standard, require more than “‘naked assertion[s]’ devoid of ‘further factual enhance- ment.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Our job is to focus on the pleaded facts, not on the labels attached to those facts. See Momence Meadows Nursing Ctr., 566 F.3d at 696. Fairly read, Beecroft’s complaint does not allege that Ocwen called her home phone using a live operator. The best Ocwen can do is to point to Paragraph 17 of the complaint, in which Beecroft states that she answered two phone calls with a live operator on the other end, and link it to the complaint’s separate references to calls to her home. But the natural read- ing of the complaint precludes such a linkage. In the para- graph immediately before Beecroft’s description of those two phone calls, she alleges: 16. Throughout the months from October 1, 2013, until February 1, 2014, Defendant Ocwen made approximately 58 calls to Plaintiff’s cellular telephone using an automatic telephone dialing system in an attempt to collect the al- leged balance due on the Loan from Plaintiff. The phone calls are detailed in paragraphs 37–95 of this Complaint. The phone calls violated the Telephone Consumer Protec- tion Act and were an invasion of Plaintiff’s privacy.

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“The phone calls” identified in the final sentence are the same “phone calls” referenced in the preceding sentence: the 58 calls to her cell phone. Significantly, the complaint contains no other factual allegations of “phone calls” other than those mentioned in paragraphs 37–95. This is the setting against which paragraph 17 must be read. There is no basis for as- suming that the “two phone calls from Ocwen” that Beecroft answered (as alleged in paragraph 17) came from a source other than the set of calls addressed in paragraph 16. Paragraph 17 confirms this interpretation: its point was not to establish that there was a live operator, but that “there was a significant delay before an operator would come onto the line,” and “[t]his delay indicated that Ocwen used an au- tomated dialer to call Plaintiff.” Automated dialers are rele- vant only for establishing TCPA liability for calls made to cel- lular phones. Compare 47 U.S.C. § 227(b)(1)(A), with 47 U.S.C. § 227(b)(1)(B). Thus, we decline to read paragraph 17 in tan- dem with the stray references to calls to Beecroft’s home. Whether Ocwen on one or more occasions did call Beecroft’s “home phone” is not pertinent for the TCPA if Beecroft is not complaining about such a (hypothetical) call in her lawsuit. And in our view, a fair reading of the complaint reveals that she is not. Furthermore, it remains true that the complaint contains no factual allegations that would substan- tiate the existence of calls that Ocwen placed to her home phone. Ocwen’s assertion that the complaint potentially alleges calls made to Beecroft’s cell phone without the use of ATDS also goes nowhere. We agree with the point that a sample size of two tells us nothing from a scientific point of view. But the complaint alleges that “some or all” of the calls to Beecroft’s

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cell phone “were made using” one of four specified ATDS systems or a “similar dialing system that has the requisite ca- pacity pursuant to the TCPA.” That signals that Beecroft is complaining about the ATDS calls, not a stray direct call. While Ocwen’s proffered rules of grammatical construc- tion hold true in isolation—no one disputes that “or” is dis- junctive and that “some” does not mean “all”— these rules do not override the text taken as a whole. And that text does not say “some but not all” of the calls were placed using an ATDS system. It says that “some or all of the calls to Plaintiff’s cell phone, including but not limited to the [58] calls listed above,” (our emphasis.) were made using the specified ATDS sys- tems. If the word “some” stood alone (without the “or all”), it would still expressly “includ[e]” all 58 calls made to Beecroft’s cell phone. “Some,” in this context, cannot be read impliedly to omit calls in the group that it specifically pur- ports to classify. More likely, the word “some” plays a distributive role in relation to the specified ATDS systems Ocwen was using. “Some” of the calls were placed using Global Dialer, “some” were placed using IAT Predictive Dialer, “some” were placed using a Davox Dialer, “some” using Aspect Dialer, and the rest used “a similar dialing system … .” It is also possible that Ocwen used only two or three of those systems. Either way, the reference to “some” calls serves only to distribute the group of 58 among the five options. Finally, even if there were calls to Beecroft’s home or cell phone that did not violate the TCPA, Ocwen must still deal with the FDCPA. Because the FDCPA requires an intent to annoy, abuse, or harass, Ocwen seeks refuge in Beecroft’s vague references to negligent conduct in Count V, where she

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says that Ocwen “intentionally and/or negligently” invaded her privacy by calling her repeatedly. But these are precisely the types of “legal labels” that Illinois courts refuse to credit without factual elaboration. See G.M. Sign, 18 N.E.3d at 79 (where a complaint is “so bereft of factual allegations” and is so vague that “myriad unpleaded scenarios could fall within its scope,” it cannot trigger a duty to defend). Count V expressly incorporates by reference the 58 calls to Beecroft’s cell phone (and potential calls to her home). It was from this set of calls that the district court inferred Ocwen’s intent to “annoy or harass” when it continued to call Beecroft after she asked it to stop. “[T]here is no bright line rule for how many calls are sufficient to support an inference of an intent to harass, oppress or abuse.” Holliday v. Virtuoso Sourc- ing Grp., LLC, No. 11-CV-314-JPG-PMF, 2011 WL 5375062, at *2 (S.D. Ill. Nov. 4, 2011). The inference depends on the cir- cumstances. Id. Several district courts have found the requi- site intent when the caller continues to call after being re- quested to stop. See Light v. Seterus, Inc., 337 F. Supp. 3d 1210 (S.D. Fla. 2018); Masuda v. Citibank, N.A., 38 F. Supp. 3d 1130 (N.D. Cal. 2014); Holliday, 2011 WL 5375062, at *2; Arteaga v. Asset Acceptance, LLC, 733 F. Supp. 2d 1218, 1227 (E.D. Cal. 2010) (discussing Fox v. Citicorp Credit Servs., Inc., 15 F.3d 1507 (9th Cir. 1994)) (“[A]a debt collector may harass a debtor by continuing to call the debtor after the debtor has requested that the debt collector cease and desist communication.”); Chiverton v. Fed. Fin. Grp., Inc., 399 F. Supp. 2d 96, 104 (D. Conn. 2005). The district court did not err in drawing a similar inference from Ocwen’s persistence in the face of Beecroft’s requests that they stop calling her.

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IV Because Zurich had no duty to defend based on the factual allegations in Beecroft’s complaint, we AFFIRM the district court’s judgment.