Court Error – Article III Standing

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7^th Circuit Court of Appeals

Case Name: MAO-MSO Recovery II, LLC, et al. v. State Farm Mutual Automobile Insurance Company

Case No.: 18-2377; 18-2463

Officials: WOOD, Chief Judge, and BRENNAN and ST. EVE, Circuit Judges.

Focus: Court Error – Article III Standing

When all the dust is cleared away, this case is relatively straightforward: we must review a dismissal for lack of Article III standing and the imposition of sanctions under Rule 11. Only the factual backdrop is complex, as it deals with one aspect of the federal Medicare program. The Plaintiffs assert that they are assignees of certain private insurers called Medicare Advantage Organizations, which provide Medicare benefits. They brought a putative class action against State Farm Mutual Automobile Insurance Company in an effort to recover payments State Farm allegedly should have made to them as reimbursement for certain medical costs. The district court dismissed the action with prejudice, although the basis for the dismissal was lack of standing. In addition, the court imposed sanctions under Rule 11 of the Federal Rules of Civil Procedure against one of the plaintiffs, MSP Recovery Claims, Series LLC, and its attorneys.

Plaintiffs, MAO-MSO Recovery II, LLC; MSP Recovery, LLC; MSPA Claims 1, LLC; and MSP Recovery Claims, Series LLC MSP (“Recovery Claims”), appealed. They argue that the court erred in its standing analysis, and that in any event it should not have dismissed the case with prejudice. Recovery Claims and the attorneys (Christopher Coffin, David Hundley, and Courtney Stidham) appealed the sanctions order. Finally, State Farm cross-appealed in order to preserve its alternative argument in favor of affirmance—that the case should be dismissed on the merits because plaintiffs failed to state a claim upon which relief can be granted. See Matushkina v. Nielsen, 877 F.3d 289, 297 (7th Cir. 2017) (noting that “[a]s a general rule, where a defendant has won dismissal for lack of standing or some other jurisdictional ground, modifying the judgment to dismissal on the merits” requires a cross-appeal).

We conclude that the district court erred insofar as it dismissed plaintiffs’ case with prejudice, when the problem was a fundamental lack of Article III standing. But this victory gets the plaintiffs only so far. The court acted well within its discretion when it denied plaintiffs a third opportunity to cure the defects in their pleadings. The court’s order, in substance, was a jurisdictional dismissal with denial of leave to amend. So understood, we affirm the judgment and correct the record to reflect that the dismissal is without prejudice. We also dismiss State Farm’s cross-appeal. Finally, we find that the district court exceeded the bounds of its discretion when it imposed Rule 11 sanctions on Recovery Claims and its attorneys.

Affirmed in part. Reversed and dismissed in part.

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.