Board of Trustees v. Underwood, Neuhaus & Co.

• Decision Date: 16 July 1990
• Docket Number: No. 89 C 6468.,89 C 6468.
• Citation: 742 F. Supp. 984
• Court: U.S. District Court — Northern District of Illinois
• Parties: BOARD OF TRUSTEES, VILLAGE OF BOLINGBROOK POLICE PENSION FUND, Plaintiff, v. UNDERWOOD, NEUHAUS & COMPANY INC., a Texas corporation, James Willhite and Robert Kolodziej, Defendants. Robert KOLODZIEJ, Third-Party Plaintiff, v. VILLAGE OF BOLINGBROOK, an Illinois municipal corporation, Third-Party Defendant.

742 F. Supp. 984

BOARD OF TRUSTEES, VILLAGE OF BOLINGBROOK POLICE PENSION FUND, Plaintiff, v. UNDERWOOD, NEUHAUS & COMPANY INC., a Texas corporation, James Willhite and Robert Kolodziej, Defendants.

Robert KOLODZIEJ, Third-Party Plaintiff, v. VILLAGE OF BOLINGBROOK, an Illinois municipal corporation, Third-Party Defendant.

No. 89 C 6468.

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

July 16, 1990.

Peter A. Cantwell, Andrew V. DePaul, Cantwell & Balonick, Chicago, Ill., for plaintiff.

Stuart D. Gordon, Norma J. Guess, Moss and Bloomberg, Ltd., Bolingbrook, Ill., Kenneth T. Kubiesa, Kubiesa & Power, Ltd., Westmont, Ill., for Robert Kolodziej.

Alex Dimitrief, Kirkland & Ellis, Chicago, Ill., for defendants.

David E. Sharp, Elaine L. Lawson, Fulbright & Jaworski, Houston, Tex., pro hac vice, for Underwood, Neuhaus & Co., Inc.

MEMORANDUM OPINION AND ORDER

LINDBERG, District Judge.

This matter arises from an alleged fraud in the investment of certain police pension fund money and it is before the court on the motion to dismiss of third party defendant, Village of Bolingbrook (Village).

Ancillary jurisdiction enables a federal court to adjudicate claims by third parties arising from the same transaction or occurrence as federal question claims and which do not themselves meet federal jurisdiction standards. Blake v. Pallan, 554 F.2d 947, 956 (9th Cir.1977). The major requirement for ancillary jurisdiction is that the claims be "inextricably tied" to plaintiff's federal question claim. Hartford Acc. & Indemnity Co. v. Sullivan, 846 F.2d 377, 380 (7th Cir.1988). One must depend upon the other; a common issue of law or fact is not enough. Id. This court has ancillary jurisdiction to hear and decide this state law claim for indemnification and defense because it arises from the same transaction as the federal securities claim, and is inextricably tied to plaintiff's federal question claim.

The underlying complaint alleges that defendant-third party plaintiff, Robert Kolodziej (Kolodziej), wilfully and with reckless disregard violated Rule 10b-5 promulgated under the Securities Exchange Act of 1934, and wilfully and with reckless disregard breached his fiduciary duty to the Village of Bolingbrook Pension Fund. See 17 CFR sec. 240.10b-5 (1975).

Kolodziej has filed a third party complaint against the Village in which he seeks indemnification for any judgment, settlement costs and costs of defense which may result from an action filed by the Board of Trustees, Village of Bolingbrook Police Pension Fund pursuant to Ill.Rev.Stat. ch. 85, sec. 2-302 (1989) and a Village of Bolingbrook ordinance, Bolingbrook Municipal Code, secs. 1-701 and 1-702 (1989) against him.

The Village has filed a motion to strike and dismiss the third party complaint alleging two propositions. First, Ill.Rev.Stat. Ch. 85, sec. 2-302 (1989) does not obligate the Village to indemnify Kolodziej because the statute makes it optional for a municipality to indemnify. Second, while the Bolingbrook Municipal Code does require the Village to provide a defense and indemnify employees under certain circumstances, this is not one of those circumstances because (a) it has not been determined that Kolodziej was acting within the scope of his employment at the time of the alleged conduct and (b) even if Kolodziej was acting within the scope of his employment, there has been no final adjudication of wilful conduct by this court so this cause of action is premature; and (c) any liability or judgment is payable to the Village so the Village is exempt from indemnification. Since the question can be decided on ripeness grounds, the court will not address whether any judgement is payable to the Village.

Parties may seek a dismissal of a cause of action at the pleading stage. However, as the Seventh Circuit has stated:

Dismissal is proper if it appears beyond a reasonable doubt that the plaintiff could prove no set of facts in support of his claim that would entitle him to the relief requested.

R.J.R. Services, Inc. v. Aetna Casualty and Surety Co., 895 F.2d 279, 281 (7th Cir.1989) quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957). All the factual assertions made in the complaint must be accepted as true and the inferences favorable to the plaintiff which may be drawn therefrom, must be drawn. Id. The court must judge the complaint in a light most favorable to the plaintiff and determine whether the allegations enable the plaintiff to prove any set of facts which would entitle him to relief. At the same time, however, parties should not be required to defend against claims for which there is clearly no basis in law. Id. It is against this background that the court views the third party complaint and the third party defendants' motion to dismiss.

I. Indemnification under Federal Law

The court will first consider whether Kolodziej is entitled to indemnity under federal law. In King v. Gibbs, 876 F.2d 1275 (7th Cir.1989), the Seventh Circuit Court of Appeals held that no right to indemnification exists under federal securities laws whether it be from a statute, rule or federal common law. It is beyond dispute that indemnification is not explicitly required by section 10(b) or Rule 10b-5 which contain no express right of indemnification. Id. at 1279; 17 CFR sec. 240.10b-5 (1975). Nor does the extensive legislative history surrounding the 1934 Act indicate that Congress intended that indemnification be available under the statute. Id. at 1281; Ellenberger, J.S. and Ellen P. Mahar, Legislative History of the Securities Act of 1933 and Securities Exchange of 1934 (1973).

In sum, this court finds that as a matter of law, federal securities laws do not create a right to indemnification. Thus, indemnification is only required if a right exists under state or municipal law.

II. Indemnification under State Law

The court next will consider Kolodziej's claim that he is entitled to indemnity under the Illinois Tort Immunity Act, Ill. Rev.Stat. ch. 85, sec. 2-302 (1989) (Act). The Act provides:

If any claim or action is instituted against an employee of a local public entity based on injury allegedly arising out of an act or omission occurring within the scope of his employment as such employee, the entity may elect to do any one or more of the following:

(a) Appear and defend against the claim or action (b) Indemnify the employee or former employee for his court costs incurred in the defense of such claim or action;

(c) Pay or indemnify the employee or former employee for a judgment based on such claim or action; or

(d) Pay, or indemnify the employee or former employee, for a compromise or settlement of such claim or action.

Ill.Rev.Stat. ch. 85, sec. 2-302 (1989) (emphasis added).

The Act provides that a municipality "may" elect to indemnify a municipal employee or "may" elect to provide a defense for that employee. Kolodziej wants this court to determine that "may elect" makes indemnification mandatory. The court declines to so hold for the following reasons.

When construing a statute, a court's primary objective is to ascertain the intent of the legislature. People v. Boykin, 94 Ill.2d 138, 141, 445 N.E.2d 1174, 68 Ill.Dec. 321 (1983); People ex rel. Cason v. Ring, 41 Ill.2d 305, 310, 242 N.E.2d 267 (1968). The Illinois Appellate Court in Heritage Bank & Trust Co. v. Harris, 132 Ill.App.3d 969, 478 N.E.2d 526, 88 Ill.Dec. 211 (1st Dist. 1985) said:

Legislative intent is to be derived primarily from a consideration of the legislative language itself. There is no rule of construction which authorizes a court to declare that the legislature did not mean what the plain language of the statute imports.

Id. 478 N.E.2d at 530, 88 Ill.Dec. at 215, citing People ex rel. Scott v. Schwulst Bldg. Center, Inc., 89 Ill.2d 365, 371, 432 N.E.2d 855, 59 Ill.Dec. 911 (1982) and Western Nat'l. Bank v. Village of Kildeer, 19 Ill.2d 342, 350, 167 N.E.2d 169 (1960).

Thus, in determining legislative intent, the first level of analysis is the language of the statute itself. Graczyk v. United Steelworkers of America, 763 F.2d 256 (7th Cir.1985), cert. denied, 474 U.S. 970, 106 S.Ct. 335, 88 L.Ed.2d 319 (1985). Words in a statute are to be given their plain and ordinary meanings. Jones v. Hanley Dawson Cadillac Co., 848 F.2d 803 (7th Cir.1988).

Section 2-302 of the Tort Immunity Act states that a municipality "may" elect to indemnify. The Illinois Supreme Court has held that "except in very unusual circumstances affecting the public interest, the legislative use of the word `may' is permissive rather than mandatory." In re Marriage of Freeman, 106 Ill.2d 290, 478 N.E.2d 326, 329, 88 Ill.Dec. 11, 14 (1985). See also Boddiker v. McPartlin, 379 Ill. 567, 578, 41 N.E.2d 756 (1942). Since there are no very unusual circumstances affecting the public interest requiring otherwise, "may" in the Tort Immunity Act must be interpreted as permissive. Consequently, the effect of the Tort Immunity Act is merely to authorize the municipality to elect to indemnify if it finds indemnification appropriate in a particular case.

Additionally, the United States District Court for the Northern District of Illinois has already analyzed aspects of this very same statute in Hall v. Sanchez, 708 F.Supp. 922 (N.D.Ill.1989). The court stated that under sec. 2-302 of the Tort Immunity Act, Ill.Rev.Stat. sec. 2-302 (1989), "the City is authorized to appear and defend against a claim or action ..." and that the "statute allows the City to appear for City employees" and "to defend employees ..." Id. at 926 (emphasis added). In accordance with Hall, this court interprets "may" as permissive, giving the municipality the authority to elect to indemnify or defend.

Thus, the Village has the option to defend or indemnify under section 2-302. Nothing in the statute mandates a municipality to indemnify or defend. Consequently, the Village is not obligated to indemnify or...