Air Crash Disaster Near Chicago, Ill. on May 25, 1979, In re

Decision Date25 May 1979
Parties12 Fed. R. Evid. Serv. 914 In re AIR CRASH DISASTER NEAR CHICAGO, ILLINOIS ON
CourtU.S. Court of Appeals — Seventh Circuit

Thomas D. Allen, Robert E. Haley, Elise E. Singer, Wildman, Harrold, Allen & Dixon, Chicago, Ill., for American Airlines.

Norman J. Barry, Christopher G. Walsh, Rothchild, Barry Meyers, Chicago, Ill., for McDonnell Douglas Corp.

John J. Kennelly, David A. Novoselsky, Chicago, Ill., for appellee.

Before COFFEY, Circuit Judge, SWYGERT, Senior Circuit Judge, and TEMPLAR, Senior District Judge. *

SWYGERT, Senior Circuit Judge.

This diversity case involves the wrongful death actions filed by the survivors of certain victims of the crash near Chicago on May 25, 1979, of a DC-10 aircraft manufactured by defendant McDonnell Douglas Corporation and owned by defendant American Airlines. Many of these actions, either filed in or removed to federal court, were consolidated for pretrial proceedings in the United States District Court for the Northern District of Illinois by an order of the Judicial Panel on Multidistrict Litigation. In re Air Crash Disaster, 476 F.Supp. 445, 449 (Jud.Pan.Mult.Lit.1979). This interlocutory appeal from the district court's ruling on the parties' motions in limine raises two issues: first, whether a federal court sitting in diversity and applying the Illinois Wrongful Death Act, 1 see In re Air Crash Disaster, 644 F.2d 633, 637 (7th Cir.1981), may admit evidence of the income tax liability the decedent would have incurred on the earnings lost because of premature death, as an aid to accurate computation of the survivor's loss; and second, whether the court may instruct the jury that whatever award it makes will not be subject to federal income tax in the hands of the survivor. 2 The district court held that under the principles of Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), it was bound to apply state law, and that Illinois courts would reject both the evidence and the jury instruction. In re Air Crash Disaster, 526 F.Supp. 226 (N.D.Ill.1981). Because we hold that state and federal law do not differ on the evidence issue, we reverse that portion of the judgment. On the jury instruction issue, we reverse because Erie is inapplicable.

It is clear that in cases involving federal substantive law the evidence of "lost taxes" would be admissible and the jury instruction on the nontaxability of the award would be proper, in appropriate circumstances. In Norfolk & Western Railway v. Liepelt, 444 U.S. 490, 100 S.Ct. 755, 62 L.Ed.2d 689 (1980), the Supreme Court held that in cases brought under the Federal Employers' Liability Act ("FELA") even state courts may not prohibit the admission of such evidence or the use of that instruction, reversing a decision of the Illinois Appellate Court, 62 Ill.App.3d 653, 19 Ill.Dec. 357, 378 N.E.2d 1232 (1978), and overruling the Illinois Supreme Court's practice under FELA, see Raines v. New York Central Railroad, 51 Ill.2d 428, 430, 283 N.E.2d 230, 232 (1972); Hall v. Chicago & North Western Railway, 5 Ill.2d 135, 149-52, 125 N.E.2d 77, 85-86 (1955). Subsequent cases have adopted Liepelt's reasoning in non-FELA federal contexts. See, e.g., Fanetti v. Hellenic Lines Ltd., 678 F.2d 424, 431 (2d Cir.1982) (Longshoremen's and Harbor Workers' Compensation Act); Austin v. Loftsgaarden, 675 F.2d 168, 183-84 (8th Cir.1982) (Securities Act of 1933 and Securities Exchange Act of 1934). See also Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473, 498 & n. 17, 101 S.Ct. 2870, 2880 & n. 17, 69 L.Ed.2d 784 (1981). The Supreme Court has left open the question whether it should extend Liepelt to diversity cases based on state law. See id. 453 U.S. at 487-88, 101 S.Ct. at 2879-80 (reserving the question whether Liepelt would control when federal right of action incorporates state law).

The defendants urge that we reverse the district court on both the evidence and the jury instruction issues. On the former, they argue that the existence of the Federal Rules of Evidence, which apply even in diversity cases, see Fed.R.Evid. 101, 1101(b), and which declare relevant evidence admissible, see Fed.R.Evid. 402, 3 make Erie inapplicable; and that Fed.R.Evid. 401, as construed by Liepelt, provides the federal definition of relevancy in this kind of case. 4 In addition, they argue that state law is identical to federal law on this issue in any case. On the jury instruction issue, they argue that Hall and Raines, the only Illinois Supreme Court precedents on point, are overruled by Liepelt, because they arose under FELA; and that we should predict that the Illinois Supreme Court would now find the reasoning of Liepelt persuasive. Alternatively, they argue that because the substance of the proposed instruction relates to the Internal Revenue Code, federal law should govern whether the instruction should be given, even in a diversity case. We address these issues in turn.

I. Admissibility of Evidence

We agree that the Federal Rules of Evidence apply and that as a consequence the district court may not categorically exclude certain kinds of evidence relevant to the determination of damages. If the rules had been promulgated under the Supreme Court's rulemaking power, 28 U.S.C. Sec. 2072 (1976), and did not transgress the limits of that power, this would be true under the reasoning of Hanna v. Plumer, 380 U.S. 460, 470-71, 85 S.Ct. 1136, 1143-44, 14 L.Ed.2d 8 (1965). But the Rules of Evidence stand on even firmer footing, for they are statutory. Pub.L. No. 93-595, 88 Stat.1959 (1975). In such a case the Rules of Decision Act, 28 U.S.C. Sec. 1652 (1976), coupled with the supremacy clause of the United States Constitution, demands that the rules apply in federal court, unless Congress exceeded its powers to regulate federal courts in enacting them. The parties have not urged us to find, and we are not prepared to hold, that the rules are unconstitutional. See 10 J. Moore & H. Bendix, Federal Practice Sec. 57 (2d ed. 1982).

Our conclusion is supported by many cases holding that the Federal Rules of Evidence govern the admissibility of evidence in diversity cases. See, e.g., Rabon v. Automatic Fasteners, Inc., 672 F.2d 1231, 1238 n. 14 (5th Cir.1982); Garwood v. International Paper Co., 666 F.2d 217, 223 (5th Cir.1982); Southern Stone Co. v. Single, 665 F.2d 698, 701 (5th Cir.1982); Ballou v. Henri Studios, Inc., 656 F.2d 1147, 1153 (5th Cir.1981); Croce v. Bromley Corp., 623 F.2d 1084, 1094 (5th Cir.1980), cert. denied, 450 U.S. 981, 101 S.Ct. 1516, 67 L.Ed.2d 816 (1981); Johnson v. William C. Ellis & Sons Iron Works, Inc., 609 F.2d 820, 821-22 (5th Cir.1980); Pollard v. Metropolitan Life Insurance Co., 598 F.2d 1284, 1286 (3d Cir.), cert. denied, 444 U.S. 917, 100 S.Ct. 232, 62 L.Ed.2d 171 (1979); Gibbs v. State Farm Mutual Insurance Co., 544 F.2d 423, 428 n. 2 (9th Cir.1976). See also Oberst v. International Harvester Co., 640 F.2d 863, 867 n. 2 (7th Cir.1980) (Swygert, J., concurring in part and dissenting in part). This result conforms with the practice in federal courts preceding the adoption of the Federal Rules of Evidence. See 10 J. Moore & H. Bendix, Federal Practice Sec. 400.12-(3) (2d ed. 1982) (in fashioning broad rules of admissibility, federal courts adopted state rules that favored admission but rejected state rules that favored exclusion); 9 C. Wright & A. Miller, Federal Practice and Procedure Sec. 2405 (1971 & Supp.1982) (same).

It does not follow, however that state evidence rules have no bearing on what evidence is admissible in federal court, for the relevance of the evidence is ascertainable only by reference to the substantive law of the state. To the extent that the state evidentiary rule defines what is sought to be proved--here, the measure of damages--it may bind the federal court under Erie principles.

If Illinois followed the rule of the majority of state courts that evidence of would-be tax liability is inadmissible for the purpose of proving the amount of damages, see cases collected in Annot., 63 A.L.R.3d 1393 (1975 & Supps.); Louissaint v. Hudson Waterways Corp., 111 Misc.2d 122, 125-26, 443 N.Y.S.2d 678, 680-81 (N.Y.Sup.Ct.1981), this subsidiary Erie problem would be quite difficult. Courts have supplied several rationales for the exclusionary rule: they have argued that the calculation of net income is too speculative or confusing because of tax rate fluctuations and the difficulty of predicting exclusions and exemptions to which the decedent would have been entitled, see, e.g., McWeeney v. New York, New Haven & Hartford Railroad, 282 F.2d 34, 35-36 (2d Cir.), (en banc), cert. denied, 364 U.S. 870, 81 S.Ct. 115, 5 L.Ed.2d 93 (1960); that inaccuracies resulting from the projection of gross rather than net income are offset by the undercompensating effects of ignoring inflation and attorney's fees, see, e.g., id. at 38; and that by making the award tax exempt, see supra note 2, Congress intended to confer a tax benefit that should be reflected in the calculation of the award, see, e.g., Louissaint v. Hudson Waterways Corp., 111 Misc.2d at 128-29, 443 N.Y.S.2d at 682.

The last of these rationales should carry no weight any longer in any court, to the extent that it relies on an interpretation of federal tax law rejected by Liepelt. 444 U.S. at 495 n. 10, 100 S.Ct. at 758 n. 10. Nevertheless, the remaining considerations may be so closely linked with the state's view of the measure of damages (which is inseparable from the substantive right of action, see Chesapeake & Ohio Railway v. Kelly, 241 U.S. 485, 491, 36 S.Ct. 630, 632, 60 L.Ed. 1117 (1916)) that it binds a federal court sitting in diversity. Several courts have either held or assumed that state law...

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