Colonial Penn Life Ins. Co. v. Hallmark Ins. Administrators, Inc.

• Decision Date: 28 July 1994
• Docket Number: No. 93-3090,93-3090
• Citation: 31 F.3d 445
• Parties: COLONIAL PENN LIFE INSURANCE COMPANY, Plaintiff-Appellee, v. HALLMARK INSURANCE ADMINISTRATORS, INCORPORATED, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 445

31 F.3d 445

29 Fed.R.Serv.3d 1070

COLONIAL PENN LIFE INSURANCE COMPANY, Plaintiff-Appellee, v. HALLMARK INSURANCE ADMINISTRATORS, INCORPORATED, Defendant-Appellant.

No. 93-3090.

United States Court of Appeals Seventh Circuit.

Argued April 13, 1994.

Decided July 28, 1994.

David L. Doyle (argued), Brian J. Williams, Pope, Cahill & Devine, Chicago, IL, for plaintiff-appellee.

Phillip Fertik, Herbert Beigel (argued), Leigh R. Lasky, Douglas W. Lohmar, Jr., Beigel, Schy, Lasky, Cohen, Rifkind & Hennessey, Chicago, IL, for defendant-appellant.

Before BAUER, WOOD, Jr. and CUDAHY, Circuit Judges.

CUDAHY, Circuit Judge.

In 1986 a company called the Markman Group wanted to sell a new type of major medical insurance policy. Daniel Kubik, an insurance consultant, approached Colonial Penn Life Insurance with a proposition: Colonial Penn could issue and underwrite the policy, which would be sold by Markman (through its existing sales agents), and serviced by Hallmark Insurance Administrators, a company that Kubik would set up with Colonial's financial support.

After some hesitation, Colonial Penn agreed, and the parties entered into a series of contracts setting out this relationship. Kubik formed Hallmark Insurance Administrators, with a $1.5 million loan from the Harris Hinsdale Bank that Colonial Penn guaranteed. Colonial Penn received from Kubik an option to buy Hallmark stock. Finally, Markman agreed to sell, and Hallmark agreed to administer, the new insurance policy.

But after a short period Colonial Penn, acting on the instructions of its parent company, backed out of the deal. Hallmark sued Colonial Penn for breach of contract, and the jury returned a $2.5 million verdict, purportedly representing the profits that Hallmark would have made had Colonial Penn honored its contractual duty to offer the policy.

Colonial Penn appealed, arguing that under the contract it was permitted--not obligated--to offer and underwrite the policy. But we affirmed the jury's verdict, finding that the contractual language was ambiguous, and that the jury was correctly instructed to award damages only if it found that the parties intended to require Colonial Penn to offer and underwrite the policy. Hallmark Ins. Administrators v. Colonial Penn, 990 F.2d 984 (7th Cir.1993).

In the meantime, Hallmark had also defaulted on its $1.5 million bank loan. As guarantor, Colonial Penn would have been liable for this amount, but it entered into an agreement with the bank (undisclosed to Hallmark) that would defer its obligation on the guaranty for three years.

Colonial Penn, after the passage of three years, made good on the guaranty, and on doing so was subrogated to the bank's rights to sue Hallmark on the underlying note. ¹ In this action (over which there is diversity jurisdiction), Colonial Penn is doing exactly that (alternatively Colonial's Penn claim can be seen as an action for reimbursement on the guaranty ²). Hallmark responded to Colonial's suit by claiming the matter was res judicata by virtue of the previous action. The district court rejected that defense, and entered summary judgment in favor of Colonial Penn for the $1.5 million, plus fees and interest. Hallmark appeals, contending primarily that Colonial Penn's action is barred by res judicata, but additionally arguing that it is not liable, under its contract with Colonial Penn, for the $1.5 million; and that the court improperly awarded fees and interest to Colonial Penn. We examine each of these arguments in turn.

I

A

Hallmark argues that Colonial Penn's suit on the guaranty arises out of the same transaction as Hallmark's breach of contract action, and is therefore res judicata. We have previously observed that the law of res judicata is "not as clear as it might be," and lamented that in this important area of law it is most unsatisfying to rely--as the cases and commentators tell us to--on "pragmatism" and fuzzy lines such as whether the parties would have expected the cases to have been tried as a unit. Herrmann v. Cencom Cable Assoc., Inc., 999 F.2d 223, 226 (7th Cir.1993). While the traditional formulation is that a claim is barred by res judicata if it emerges from the same "core of operative facts" as a previously litigated matter, see generally, In the Matter of Energy Cooperative Inc., 814 F.2d 1226, 1230-31 (7th Cir.), cert. denied, 484 U.S. 928, 108 S.Ct. 294, 98 L.Ed.2d 254 (1987), we have recently, attempting to draw a brighter line, suggested that "two claims are one for the purposes of res judicata if they are based on the same, or nearly the same, factual allegations." Herrmann, 999 F.2d at 226.

The two claims before us do not arise out of the same factual allegations. In the first litigation, Hallmark alleged that Colonial breached the Administrator Agreement, under which Colonial promised to issue and underwrite, and Hallmark promised to administer, the new policy. Colonial Penn, in its counterclaim (which--on this point--sought only an accounting), alleged that Hallmark breached the Guaranty Agreement by withdrawing the last $500,000 from the bank loan fund after learning that Colonial Penn would no longer offer the insurance policy. R.O.A. 20, Exh. H, p 18. There was no allegation that Hallmark defaulted on the loan or that Colonial Penn paid on the guaranty. In sum, none of the facts alleged would give rise to an action by Colonial Penn against Hallmark for the amount of the loan. In the present litigation, Colonial Penn alleges that Hallmark defaulted on the bank loan, and that it was forced to make good on the guaranty. R.O.A. 1, pp 14-20. Because this claim is not "based on the same, or nearly the same, factual allegations" as the previous litigation, it is not barred by res judicata. Herrmann, 999 F.2d at 226.

B

Hallmark also advances the related argument that Colonial Penn's claim against it on the guaranty was a compulsory counterclaim under Fed.R.Civ.P. 13(a), which requires a defendant to plead any counterclaim that "arises out of the transaction or occurrence" that forms the basis of the plaintiff's claim. On that issue we find the opinion in Valencia v. Anderson Brothers Ford, 617 F.2d 1278 (7th Cir.1980), instructive. That case involved an automobile loan, made by a dealer, that was found to violate the Truth in Lending Act, 15 U.S.C. Sec. 1601 et seq. We held that a lender's suit on a loan was not a compulsory counterclaim to the borrower's suit for damages under the Act. Though as a linguistic matter the claims might arguably have been said to come out of the same "transaction"--the loan agreement--the relationship between the claims lacked the necessary "logical relationship" to make the counterclaim compulsory. Id. at 1291.

The same is true here, except in this case, unlike in Valencia, the two claims do not even emerge from the same document. The nub of Hallmark's suit against Colonial Penn was Colonial Penn's agreement to issue and underwrite the policy, embodied in the Administration Agreement. That issue bears no logical relationship with the claim here, which can be seen either as an action to assert the bank's rights to which Colonial Penn had been subrogated, or alternatively as a claim for reimbursement. The fact that Colonial Penn had no cause of action against Hallmark for the $1.5 million until it paid on the guaranty makes it obvious that Colonial Penn's claim against Hallmark did not--for the purposes of Rule 13(a)--arise out of the same "transaction" as Hallmark's claim against Colonial Penn. See also Burlington Northern R. Co. v. Strong, 907 F.2d 707, 711-12 (7th Cir.1990); Gilldorn Sav. Ass'n v. Commerce Sav. Ass'n, 804 F.2d 390, 396 (7th Cir.1986). And in any case, this circuit's formulation of the "logical relationship" test has been described (and praised) as a "narrow" one, that perhaps asks little more than whether the plaintiff's claims would be barred by res judicata. See Comment, Narrowing the Scope of Rule 13(a), 60 U.Chi.L.Rev. 141 (1993). If, in fact, our test for determining whether a counterclaim is compulsory is simply to ask whether the claim would also be barred by res judicata, then Hallmark's argument that Colonial Penn's claim was a compulsory counterclaim would add nothing to its argument that the claim was barred by res judicata. But it is in any event clear to us that there is no "logical relationship" between the claims, so Colonial Penn's claim in the present litigation was not a compulsory counterclaim to Hallmark's claim in the previous action.

C

Intermingled with its argument that Colonial Penn was required to bring this claim earlier, Hallmark insists that Colonial Penn in fact litigated this issue in the previous lawsuit, and must not be permitted to bring the claim again. The heart of this argument is that in the first lawsuit Colonial Penn listed, in a pretrial memorandum, "$1.5 million Harris Bank--Hinsdale Bank loan" as "special damages" on its counterclaim. R.O.A. 20, Exh. I, p 1. Hallmark thus contends that Colonial Penn knew that it was going to have to make good on its guaranty, and had already brought suit to recover that amount. Colonial Penn responds by saying that this item of damages was meant to approximate the injury it had suffered by virtue of Kubik and Hallmark's breach of the Guaranty Agreement--their failure to devote their energies to the business of Colonial Penn--and not a claim on the guaranty itself.

This explanation makes little sense to us, as a matter either of economics or of common sense. If the point of these "special damages" was to argue that these funds were to have been used to further the joint insurance venture, and that had Hallmark not breached its contract (by failing to devote its energies to the business), the business would have succeeded and Colonial Penn would not have had to pay on the guaranty, it would be possible to argue that the matter had been litigated. But because Colonial Penn had not yet paid on the...