Colton v. Swain, 74--1572

• Decision Date: 17 December 1975
• Docket Number: No. 74--1572,74--1572
• Citation: 527 F.2d 296
• Parties: Robert COLTON, Plaintiff, v. John B. SWAIN et al., Defendants and Third-Party Plaintiffs-Appellees, v. PACIFIC INDEMNITY CO., a corporation, Third-Party Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 296

527 F.2d 296

Robert COLTON, Plaintiff, v. John B. SWAIN et al., Defendants and Third-Party Plaintiffs-Appellees, v. PACIFIC INDEMNITY CO., a corporation, Third-Party Defendant-Appellant.

No. 74--1572.

United States Court of Appeals Seventh Circuit.

Argued Sept. 8, 1975.

Decided Dec. 17, 1975.

Jay S. Judge and James R. Schirott, Park Ridge, Ill., for appellant.

David P. Schippers, Chicago, Ill., John J. Bowman, State's Atty., and Malcolm F. Smith, Asst. State's Atty., Wheaton, Ill., for appellees.

Before CASTLE, Senior Circuit Judge, and SWYGERT and PELL, Circuit Judges.

SWYGERT, Circuit Judge.

There are two questions presented on this appeal: whether a liability insurance policy covers actions brought under 42 U.S.C. § 1983 and, even if it should, does the inclusion of a no-action clause and a no-impleader/joinder clause bar a third-party action to determine the extent of coverage prior to a judgment of liability against the insured? The district court denied the insurer's motion to dismiss the third-party complaint, holding that the action was appropriate under Rule 14 of the Federal Rules of Civil Procedure, and granted the insureds' motion for a summary judgment on the question of the company's liability for section 1983 violations. ¹

The present controversy arose out of an action filed against the third-party plaintiffs, sheriff's deputies in DuPage County, Illinois at the time of the incident in question, by Robert Colton who alleged that the deputies violated 42 U.S.C. § 1983 and the Fourth, Fifth, Seventh, and Fourteenth Amendments to the United States Constitution. The defendant-deputies filed their third-party complaint against Pacific Indemnity Company, their insured, after it had notified them that it would deny coverage on the grounds that section 1983 violations are not covered by the policy and that Colton's complaint in the principal action failed to state any other cause of action which was within the provisions of the policy. There is no dispute that the policy was in effect at the time of the alleged incident which is the basis of Colton's suit.

I

We must first consider whether the third-party action is barred at this time. Pacific Indemnity asserts that there is no rule of substantive law which gives the defendant-deputies the right to bring an action to define the company's liability under the policy and to require it to defend them prior to judgment against them in the suit filed by Colton. A resolution of this issue must precede a consideration of the company's contention that the policy does not anticipate coverage for a claim under section 1983. If the district court was incorrect in its conclusion that the impleader was proper, we need not reach the coverage question.

Pacific Indemnity asserts that no action can be maintained against it at this time because no final judgment has been rendered against the insured. It argues that this result is compelled by both the provisions of the policy and by the law and public policy of the state with the most relevant contacts with the contract in question. The essence of its argument is that Rule 14 is procedural in nature and may not be used to 'abridge, enlarge or modify' the substantive rights of any litigant. 3 J. Moore, Federal Practice P14.03(1), and cases cited therein. Pacific Indemnity argues that the substantive law to be applied is that established by the contract in question, as well as by virtue of Illinois law which prohibits direct actions (and by implication, impleader) until a final judgment has been entered against a person claiming the right to indemnity under an insurance policy which contains a no-action clause.

A

The insurance policy in the instant case contains a no-action clause and a no-impleader/joinder clause. ² Such clauses are directly opposed to the policies underlying Rule 14. That rule is designed to avoid circuity of actions and to expedite the resolution of secondary actions arising out of or in consequence of the action originally instituted. The rule guarantees consistent results, saves the time and cost involved in the needless repetition of evidence at a subsequent trial, and prevents the defendant in the original action from being handicapped by the time which may elapse between a judgment against him and a judgment in his favor against the insurance company. Jordan v. Stevens, 7 F.R.D. 140 (1945). As Jordan points out, the purposes served by the rule reflect the public policy against costly and unnecessary adjudications, and private contractual arrangements between individuals should not circumvent the policy of the rule.

B

Pacific Indemnity also contends that the third-party complaint should have been dismissed because the law and public policy of Illinois mandate that result. Pacific Indemnity's position is that when a policy contains a no-action clause the substantive law of Illinois grants it the right to be free of suit until a final judgment has been rendered in the principal action against its insured. Thus it attempts to characterize the question of the propriety of impleader as substantive rather than procedural under Rule 14. .the company argues that if there were in fact a substantive right under Illinois law barring impleader, Rule 14 could not be used to circumvent that right.

The defendant-deputies on the other hand urge that the question of impleader be considered independent of the substantive law of the State of Illinois. The district judge agreed and listed three alternative bases for allowing impleader:

(t)he Illinois prohibition against direct action against an insurer is not a bar to a third party complaint under Rule 14. Since the original complaint alleges a federal cause of action based on violations of a federal statute, the third party complaint is ancillary to the primary claim and not necessarily dependent on state law or policy for its determination. Further, federal courts have allowed third party complaints under Rule 14 regardless of state policy based on the federal procedural policy of efficiency in litigation. Federal courts have generally allowed third party complaints against insurers in actions brought under federal question jurisdiction. Colton v. Swain, 358 F.Supp. 859, 862--63 (N.D.Ill.1973). (citations omitted.)

The first basis, that the principal action was founded on federal question jurisdiction, is inappropriate. Although jurisdiction in third-party actions under Rule 14 is ordinarily considered ancillary to the principal action, policies which mandate the application of state law in a diversity case (see Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), and its progeny), apply with equal validity to the impleader of an insurance company under Rule 14. Here, the controversy between the third-party defendant-deputies and the insurance company is one which arises in contract. An insured should not be able to avoid the state law limiting his contractual rights by impleading an insurance company merely because a suit against him is fortuitously based on federal question jurisdiction rather than on diversity of citizenship. Cf. Kennedy v. Pennsylvania R.R. Co., 282 F.2d 705, 709 (3d Cir. 1960). As expressed by the Second Circuit in connection with a choice of law question in a case involving trademark infringement:

(i)t is the source of the right sued upon, and not the ground on which federal jurisdiction is founded, which determines the governing law. Maternally Yours, Inc. v. Your Maternity Shop, 234 F.2d 538, 540 n. 1 (2d Cir. 1956). See also Sargent v. Genesco, Inc., 337 F.Supp. 1244 (M.D.Fld.1972), 3 J. Moore, Federal Practice, Vol. 1A § 305(3) (2d ed. 1974).

The source of the contractual right to indemnity invoked in the third-party complaint here is the law of Illinois, the state in which the contract was formed, the insured reside, and the incident which gave rise to the action took place. Hartliep Transit Co. v. Central Mut. Ins. Co. of Chicago, 288 Ill.App. 140, 5 N.E.2d 879 (1936); Gray v. Pennsylvania Mut. Life Ins. Co. of Philadelphia, 5 Ill.App.2d 541, 126 N.E.2d 409 (1955).

The district judge also noted that third-party complaints have been allowed under Rule 14 without regard to state policy. This is true when the state policy refers only to procedural matters and the third-party action merely alters the time at which the action is initiated. Accordingly, the expedition of a claim based on state substantive law is within the power of a federal court employing Rule 14. The language of the rule itself allows such an interpretation:

(a)t any time after commencement of the action a defendant party, as a third-party plaintiff, may cause a summons and complaint to be served upon a person not a party to the action who is or may be liable to him for all or part of the plaintiff's claim against him. (emphasis added.)

This acceleration of claim theory is not applicable, however, given the posture in which Pacific Indemnity has presented its objections, based as they are on state substantive law. Pacific Indemnity argues that it was granted a right which cannot be impaired by federal rules of procedure. Its argument is stated thus:

(I)t is clear that one may not use a procedural rule such as Rule 14 to carve out an exception to a substantive rule that the 'no action' clause bars a Third Party Action by the insured against the insurer.

If there is no substantive right granted under state law to the defendant-deputies impleader is improper. If, in fact, there is a substantive right guaranteed the company to be free of suit, the procedure would be inappropriate. Rule 14 may control the timing of a suit grounded in substantive law, but may not be used to create a right of action. Such a right depends upon the existence of a state-created liability. General Dynamics Corp. v. Adams, 340 F.2d 271 (5th Cir. 1965); American Zinc Co. of Ill. v. H. H. Hall Constr. Co., 21 F.R.D. 190, 191--92 (E.D.Ill.1957).

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