Bankers Trust Co. v. Old Republic Ins. Co.

• Decision Date: 25 October 1988
• Docket Number: No. 87 C 7853.,87 C 7853.
• Citation: 697 F. Supp. 1483
• Court: U.S. District Court — Northern District of Illinois
• Parties: BANKERS TRUST COMPANY, Plaintiff, v. OLD REPUBLIC INSURANCE COMPANY, a Pennsylvania corporation, and Chicago Underwriting Group, Inc., a Delaware corporation, and Employers Insurance of Wausau, a Mutual Company, a Wisconsin corporation, and Lee Keeling & Associates, an Oklahoma corporation, Defendants. EMPLOYERS INSURANCE OF WAUSAU, a Mutual Company, Cross-plaintiff, v. LEE KEELING & ASSOCIATES, INC., an Oklahoma corporation, Cross-defendant.

697 F. Supp. 1483

BANKERS TRUST COMPANY, Plaintiff, v. OLD REPUBLIC INSURANCE COMPANY, a Pennsylvania corporation, and Chicago Underwriting Group, Inc., a Delaware corporation, and Employers Insurance of Wausau, a Mutual Company, a Wisconsin corporation, and Lee Keeling & Associates, an Oklahoma corporation, Defendants.

EMPLOYERS INSURANCE OF WAUSAU, a Mutual Company, Cross-plaintiff, v. LEE KEELING & ASSOCIATES, INC., an Oklahoma corporation, Cross-defendant.

No. 87 C 7853.

United States District Court, N.D. Illinois, E.D.

October 25, 1988.

Gerald G. Saltarelli, Robert N. Hermes, Butler Rubin Newcomer Saltarelli & Boyd, Chicago Ill., White & Case, New York City, for plaintiff.

Richard A. Devine, Bruce R. Meckler, Michael M. Marick, Phelan Pope & John, Chicago Ill., for Old Republic Ins. Co.

Robert J. Lepri, Trizna & Lepri, Chicago Ill., Richard T. Sonberg, Tulsa Okla., for Lee Keeling & Associates, Inc. Michael E. Dowd, Brian A. Frankl, Dowd & Dowd, Chicago Ill., for defendant and cross-plaintiff Employers Insurance of Wausau.

MEMORANDUM AND ORDER

MORAN, District Judge.

The dispute in this case concerns a potential insurance claim under two separate professional liability policies. Plaintiff Bankers Trust Company ("Bankers") seeks a declaratory judgment that one of two insurance companies — Old Republic (with its management company, Chicago Underwriting Group) or Employers Insurance of Wausau ("Wausau") — will be liable on excess liability policies issued to Lee Keeling & Associates ("LKA"), a firm of consulting petroleum engineers. Bankers alleges that between 1981 and 1984 LKA negligently appraised certain oil and gas reserves of Scandrill, Inc. Bankers claims to have relied on these appraisals in extending over $100 million in loans. Scandrill defaulted on those loans in 1984 and Bankers thereafter brought suit against LKA — now in the discovery stages in the United States District Court for the District of Oklahoma — claiming damages in excess of $30 million (hereinafter "the Oklahoma litigation").

The first $2 million in liability is covered by a primary insurer who has admitted coverage and is not a party to this action. At issue is LKA's coverage for liability in excess of that amount. Wausau issued an excess liability insurance policy for $3 million to LKA covering 1983. In November 1984 Old Republic issued a similar policy to LKA covering 1985. In November 1985 Old Republic brought suit against LKA in this United States District Court before Judge Hart for rescission of its insurance policy, alleging that LKA was aware of Bankers' claim when it applied for insurance with Old Republic, but failed to disclose this fact. Old Republic Insurance company, et al., v. Lee Keeling & Associates, Inc., No. 86 C 6950 (hereinafter the "Old Republic litigation"). Bankers was not a party to that litigation but, instead, on September 10, 1987, it filed this action to determine excess liability coverage for damages arising from the Oklahoma litigation. While a motion to consolidate the two actions was pending before Judge Hart, Old Republic and LKA on November 24, 1987, entered into a settlement agreement which declared the policy null and void, and placed $425,000 in an escrow account for the benefit of LKA in connection with the Oklahoma litigation. The settlement mooted the motion to consolidate.

Bankers then amended its complaint, seeking to set aside the settlement agreement between LKA and Old Republic as a fraudulent conveyance (count I). It also seeks a declaration that Old Republic is obligated to indemnify LKA with respect to the claims asserted in the Oklahoma litigation and that the settlement agreement has no effect on the rights of Bankers (count II). Bankers also asserts that in the event the Old Republic policy is rescinded, Wausau is liable on its policy (count III). Wausau cross-claims against LKA, seeking a declaratory judgment that it is free from liability on its policy. Old Republic now moves to dismiss count I pursuant to Rule 9(b) of the Federal Rules of Civil Procedure, for failure to allege fraud with particularity, and to dismiss count II (or in the alternative for summary judgment on that count) on grounds of collateral estoppel. Defendant LKA has moved to dismiss the amended complaint and Wausau's cross-claim for lack of personal jurisdiction. We deny all motions.

Failure to Allege Fraud With Particularity

Rule 9(b) requires parties averring fraud to plead with particularity the circumstances constituting such fraud. This requirement imposes a somewhat greater pleading burden on plaintiffs than does the normal notice provisions in Fed.R.Civ.P. 8. The purpose of Rule 9(b) is twofold: it is intended to (1) supply the defendant "with sufficient information with which to frame a responsive pleading," Alco Financial Services v. Treasure Island Motor Inn, 82 F.R.D. 735, 737 (N.D.Ill.1979), and (2) "safeguard potential defendants from lightly made claims charging commission of acts that involve some degree of moral turpitude." 5 Wright and Miller, Federal Practice and Procedure Civil Section 1296. The requisite degree of specificity depends on the circumstances of each case. Darling & Co. v. Klouman, 87 F.R.D. 756, 758 (N.D.Ill.1980). Rule 9(b) is not a rigid rule and it is satisfied if the amended complaint reasonably notifies the defendants of their roles in the alleged scheme. Morgan v. Kobrin Securities, 649 F.Supp. 1023, 1028 (N.D.Ill.1986).

Count I contains sufficient allegations to satisfy the requirements of Rule 9(b). Plaintiff alleges that it anticipates an award of damages in the Oklahoma litigation in excess of $10 million and that LKA would look to its policy with Old Republic to satisfy that judgment (am. cplt. ¶ 19). LKA will not have sufficient assets to meet this liability without Old Republic's insurance coverage (id. ¶ 20). Plaintiff alleges that the settlement in the Old Republic litigation was without adequate and sufficient consideration and that the purpose of the agreement "was to frustrate, delay, hinder or defraud Bankers as a creditor of LKA" (id. ¶¶ 22, 23). The amended complaint identifies the parties to the allegedly fraudulent transaction and their purpose for entering into it.

Old Republic states here the bases of its suit against LKA before Judge Hart and argues that the settlement reached was in good faith. These issues, however, go to the merits of plaintiff's claim to set aside the settlement agreement and do not concern Rule 9(b) pleading requirements. Count I satisfies those requirements by identifying the transaction and by alleging the requisite intent. We leave the merits of plaintiff's charge for another day.

Preclusive Effect of the Old Republic Litigation Settlement

Old Republic moves to dismiss count II for failure to state a claim upon which relief may be granted, but we treat its motion as one for summary judgment pursuant to Rule 56 because it refers to matters outside the pleadings. The pending motion focuses on the preclusive effect of an earlier diversity action between an insurer and its insured on the rights of an injured party. Old Republic claims that Bankers was not a necessary party to its lawsuit against LKA, that the final judgment in that suit binds Bankers as to issues litigation and that because Bankers failed to intervene there it is precluded from challenging the settlement approved by Judge Hart. We reject these contentions and agree with Bankers that since it was not a party to the prior proceedings it is not bound by the settlement agreement.

The doctrine of collateral estoppel "is central to the purposes for which civil courts have been established, the conclusive resolution of disputes within their jurisdiction." Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979). Issues that are actually and necessarily determined by a court of competent jurisdiction are conclusive in subsequent suits involving a party to the prior litigation. Id. Under traditional collateral estoppel rules a party to the successive litigation is not bound by a prior judgment unless he or she was a party to the prior litigation or was in privity with one who was. Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 414, 66 L.Ed.2d 308 (1980); Lee v. City of Peoria, 685 F.2d 196, 199 (7th Cir.1982); Smith v. Bishop, 20 Ill.2d 434, 187 N.E.2d 217, 219 (1962). However, Judge Aspen recently noted there has been "a loosening of the traditional and sometimes artificial limitations on the application of res judicata and collateral estoppel." Diaz v. City of Chicago, 601 F.Supp. 1251, 1253 (N.D.Ill.1984) (citations omitted). All parties agree that Bankers was not a party to the Old Republic litigation, nor was it in privity with a party thereto. The question presented here is whether Bankers is bound by the settlement agreement because it knew about the litigation, participated in the production of evidence, and did not intervene in the lawsuit.

Although the parties neglect the issue, we must first discuss whether the governing law is state or federal. It is generally recognized that if the prior judgment was rendered in state court, then state law would apply; that if the prior action concerned a federal question and was in federal court, then federal collateral estoppel principles would govern. This case, however, involves the preclusive effect of a prior judgment in federal court sitting in diversity on a subsequent federal diversity action. Whether federal or state law applies in this situation has never been satisfactorily addressed by the Seventh Circuit,¹ although it has received extensive discussion elsewhere. See 18 Wright, Miller & Cooper, Federal Practice & Procedure: Jurisdiction Section 4472, p. 735 et seq. (concluding that federal law usually applies); Annotation State or Federal Law as Governing Applicability of Doctrine of Res Judicata or Collateral Estoppel in Federal Court Action, 19 A.L.R.Fed....