Kush v. American States Ins. Co.

• Decision Date: 22 July 1988
• Docket Number: No. 87-2238,87-2238
• Parties: Alex KUSH, Plaintiff-Appellant, v. AMERICAN STATES INSURANCE CO., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1380

853 F.2d 1380

Alex KUSH, Plaintiff-Appellant, v. AMERICAN STATES INSURANCE CO., Defendant-Appellee.

No. 87-2238.

United States Court of Appeals Seventh Circuit.

Argued Feb. 25, 1988.

Decided July 22, 1988.

Andrew W. Brainerd, Brainerd & Bridges, Chicago, Ill., for plaintiff-appellant.

Christine L. Olson, McKenna, Storer, Rowe, White & Farrug, Chicago, Ill., for defendant-appellee.

Before CUDAHY, FLAUM and EASTERBROOK, Circuit Judges.

CUDAHY, Circuit Judge.

This case grows out of a coverage dispute between an insured corporation and its liability insurer. Defendant American States Insurance Company ("American States") insured A. Kush and Associates, Ltd. ("Limited"), a privately-held Illinois corporation engaged in direct-mail sales, under an umbrella liability policy. Limited was sued in a New York state court for damages allegedly caused by improper advertising. American States asserted that the suit was outside the policy's scope; so it denied coverage and refused to pay Limited's defense costs. Limited filed suit against the insurer in federal court seeking a declaratory judgment and damages for alleged breach of the policy. That action is still pending; Limited has obtained partial summary judgment on some counts.

Plaintiff Kush is chairman of Limited and, according to the complaint, owns all its common stock. He brought this diversity action under Illinois law accusing American States of intentional infliction of emotional distress in its handling of Limited's claim. The court dismissed the complaint for failure to state a claim, holding in the alternative that the claim was preempted by section 155 of the Illinois Insurance Code, Ill.Rev.Stat. ch. 73, para. 767 (1985), and that the complaint failed to allege conduct sufficiently outrageous to constitute intentional infliction of emotional distress. Kush appeals and we affirm.

I.

We review the district court's dismissal de novo, accepting as true all well-pleaded factual allegations and the inferences reasonably drawn from those facts. See Forys v. United Food & Commercial Worker's Int'l Union, 829 F.2d 603, 604 (7th Cir.1987). Like the district court, we look only to the complaint itself, disregarding plaintiff's attempts here and below to supplement that complaint with an argumentative and conclusory affidavit by his attorney. In particular, plaintiff urges us to consider the affidavit in light of the district court's improper reliance, in dismissing the action, upon discovery in the related case brought by Limited against American States. It is true that Judge Grady made a passing reference to "extensive discovery in this case" in his dismissal opinion. Kush v. American States Ins. Co., No. 87 C 2164, mem. op. at 9 (N.D.Ill. July 17, 1987) . At that point no discovery had been undertaken in this case, although it was ongoing in the related breach of contract case, which was pending before the same judge. Reference to that discovery was error; nonetheless, the error is harmless. A close reading of the opinion shows that Judge Grady relied on the discovery only to support his belief that allowing leave to amend would not be productive. The discovery did not influence his determination that the complaint failed to state a claim. In any event, the remedy for the error of improper reliance on certain discovery would not be for us to consider other material that on its own merits was properly excluded. That would only compound the problem. We review the complaint's sufficiency de novo and may determine its merit (or lack thereof) for ourselves, our judgment untainted by the district court's mistake.

The complaint alleges that in October 1980 Limited purchased several American States insurance policies, including the "Super Shield Umbrella Policy" at issue here. That policy insured Limited against liability arising out of its advertising activities. In December 1983, Limited was sued in New York federal district court. Some claims in that case involved "advertising activities" within the policy's scope.

Limited advised American States' agent of the suit's pendency in January 1984. The agent informed the insured that the New York claims were outside the scope of the policy, and that therefore American States had no duty to defend Limited in the action or to indemnify the company for any damage award. The agent reiterated this denial of coverage three times during 1984.

During or after February 1985, plaintiff and his attorney (presumably both representing Limited, since plaintiff was not insured under the policy) met on several occasions with representatives of American States to discuss the coverage dispute. American States continued to deny coverage and a duty to defend until October 1985, allegedly hoping to gain negotiating leverage by virtue of the financial cloud cast over Limited by the New York suit, and by "the personal emotional and physical distress this suit and defendant's conduct were causing plaintiff." At some point during these events, Kush suffered a heart attack and was hospitalized. Eventually, American States tendered a defense, but the complaint alleges the insurer only did so on "inequitable and unreasonable terms." Finally, it alleges in conclusory fashion that American States continued its "effort to defraud Limited" by committing eight unspecified improper claims practices and tendering false defenses in the related breach of contract case. Kush asserts that American States knew or should have known that these acts would cause him severe emotional distress and disabling illness. He asks for ten million dollars in compensatory damages.

II.

This case has several fatal flaws. The first and perhaps most obvious question is whether Kush can bring the action at all. Kush, after all, was not American States' insured. The insurer allegedly had a duty to defend and owed coverage to Limited, but it owed no such duties to Kush. The complaint alleges a run-of-the-mill coverage dispute between an insurer and its insured. Kush was not a party to that dispute.

This view of the case is confirmed by close examination of the complaint. All of the actions alleged with particularity were aimed at Limited, not at Kush. Kush recognizes this when he begins the key paragraph, a list of alleged tortious acts, with the allegation that the actions were undertaken "[i]n support of [defendant's] effort to ... defraud Limited." Complaint at 4 (emphasis added). At another point, Kush states that American States "intended ... to derive an unlawful and unconscionable advantage in its ongoing discussions and negotiations with Limited." Id. Any harm to Kush was incidental to the central dispute between the insurer and Limited.

The lack of any direct relationship between Kush and American States presents an insuperable hurdle to his case. In order to sustain an emotional distress claim, Kush must show a relationship between American States and Kush individually such that American States has "actual or apparent authority over [Kush] or power to affect [his] interest." McGrath v. Fahey, 163 Ill.App.3d 584, 117 Ill.Dec. 304, 307, 520 N.E.2d 655, 658 (1st Dist.1987) (citing Public Fin. Corp. v. Davis, 66 Ill.2d 85, 90, 4 Ill.Dec. 652, 654, 360 N.E.2d 765, 767 (1976)). Putting aside for the moment the question whether American States' conduct was sufficiently outrageous to give rise to a tort claim, see infra p. 1386 n. 4, Kush has not shown that American States possessed any direct power to affect his interests.

Kush was a shareholder of Limited, and all of the damages caused him result solely from his role as a shareholder. American States had no direct relationship with Kush. True, its actions could affect Limited's interests, but Limited is a separate entity from Kush. We are reluctant to find that every action detrimental to a corporation gives rise to a tort claim by each of the company's stockholders. That holding could quickly lead to absurd results. One has only to imagine the consequences of such a rule applied to the Texaco-Pennzoil imbroglio. All of the Illinois cases we could find were brought by policyholders or beneficiaries. Kush points us to no authority supporting his assertion that a shareholder of an insured corporation who is neither policyholder nor beneficiary may bring an emotional distress claim against an insurer. We find no reasoned basis for taking that unprecedented step today.

Our holding is supported to some extent by traditional shareholder standing rules. In Illinois, as in other jurisdictions, the general rule is that "a stockholder of a corporation has no personal or individual right of action against third persons for damages that result indirectly to the stockholder because of an injury to the corporation." Twohy v. First Nat'l Bank, 758 F.2d 1185, 1194 (7th Cir.1985). Illinois cases construe this rule strictly, allowing for very few exceptions. Generally, courts allow a shareholder to sue only where there is a direct injury to the shareholder in his or her individual capacity, independent of any duty owed the corporation. See Continental Ill. Nat'l Bank & Trust Co. v. Stanley, 585 F.Supp. 1385, 1388 (N.D.Ill.1984); Poliquin v. Sapp, 72 Ill.App.3d 477, 480, 28 Ill.Dec. 615, 618, 390 N.E.2d 974, 977 (4th Dist.1979); Zokoych v. Spalding, 36 Ill.App.3d 654, 663, 344 N.E.2d 805, 813 (1st Dist.1976).

One exception to that rule might conceivably be applicable here. "[T]he separate identity may be disregarded in exceptional situations where it otherwise would present an obstacle to the due protection or enforcement of public or private rights." Bevelheimer v. Gierach, 33 Ill.App.3d 988, 992-93, 339 N.E.2d 299, 303 (1st Dist.1975). However, as we have shown above, no exceptional circumstances are present here. Application of the general rule would not impede proper enforcement of Kush's rights, since the law governing emotional distress claims and the shareholder standing rules are mutually reinforcing in this...