Khalaf v. Bankers & Shippers Ins. Co.

• Citation: 404 Mich. 134,273 N.W.2d 811
• Decision Date: 27 December 1978
• Docket Number: Docket No. 57363,No. 12,12
• Parties: Niam KHALAF and Almaza Khalaf, Plaintiffs-Appellants, v. BANKERS & SHIPPERS INSURANCE COMPANY, Defendant, and James Dullard, Defendant-Appellee. Calendar
• Court: Supreme Court of Michigan

Page 811

273 N.W.2d 811

404 Mich. 134

Niam KHALAF and Almaza Khalaf, Plaintiffs-Appellants, v. BANKERS & SHIPPERS INSURANCE COMPANY, Defendant and James Dullard, Defendant-Appellee.

Docket No. 57363.

Calendar No. 12.

Supreme Court of Michigan.

Argued June 10, 1976.

Decided Dec. 27, 1978.

Goodman, Eden, Millender, Goodman & Bedrosian by Robert A. Koory, Paul A. Rosen, Detroit, for plaintiffs-appellants.

Sommers, Schwartz, Silver, Schwartz & Tyler, P. C., Detroit, for defendant Dullard.

LEVIN, Justice.

An Illinois corporation committed a tortious act in Michigan and its insurer refused to defend against an action brought by Michigan residents or to satisfy a judgment.

This is an action by the Michigan residents against an Illinois insurance agent for negligence (errors and omissions) in procuring insurance for the corporation. The issue is whether, under the long-arm statute, ¹ a Michigan court may exercise limited personal jurisdiction over the insurance agent on the ground that, as a consequence of his negligence, the corporation was uninsured for its tortious act and the Michigan residents are unable to collect the judgment entered by a Michigan court in Michigan or elsewhere.

We conclude that there were less than the "minimum contacts" required with Michigan to satisfy federal constitutional requirements, and that Michigan cannot exercise jurisdiction over him.

I

Khalaf was injured while operating a press in Michigan. He and his wife commenced an action in the Wayne Circuit Court against National Machine Servicing Company, Inc., an Illinois corporation, for negligence and breach of implied warranty in servicing the press. National's insurer, Bankers & Shippers Insurance Company, refused to defend, claiming that the policy issued to National did not cover the operations which resulted in Khalaf's injury. The circuit judge entered an order permitting counsel retained by Bankers, who had previously entered an appearance for National, to withdraw as its counsel of record. A $250,000 default judgment was subsequently entered against National and remains unsatisfied.

The Khalafs commenced this action in the Wayne Circuit Court against Bankers for reformation, breach of contract, and negligence, and against James Dullard, the Illinois insurance agent who had procured the insurance for National from Bankers, alleging negligence in such procurement.

An order was entered granting Dullard's motion to quash service of process on the ground that the court did not have limited personal jurisdiction over him. The Court of Appeals affirmed.

There are, broadly stated, three issues:

1) Does the Khalafs' complaint state a claim for relief, an issue of substantive law?

2) Did Dullard's acts create a relationship to Michigan within the meaning of the long-arm statute, an issue of statutory construction?

3) Would exercise of jurisdiction be compatible with the concepts of fundamental fairness embodied in the Due Process Clause, an issue of federal constitutional law?

We do not consider the issues of substantive law and statutory construction because we conclude that the record does not establish that Dullard's relationship with Michigan was such as to make exercise of jurisdiction over him reasonable ² under the Due Process Clause.

II

Although we reject the Khalafs' long-arm theory on due-process grounds, and thus there is no need to decide whether their substantive theory is correct, we nevertheless state it because their long-arm theory builds on their substantive theory.

Their substantive theory is that an insurance agent is subject to liability in an "action for tort" to an unpaid judgment creditor for negligent failure to procure insurance which would have provided a source of recovery. Dullard, by reason of his contractual relationship with National, owed a duty to exercise due care in the performance of the contract and, as an alternative to an action for breach of contract, an action may be maintained in tort for negligent performance of that duty. ³ The acts committed by National which caused the Khalafs' loss are within the ambit of the coverage which Dullard agreed to procure for National and, had the agreed-upon insurance been procured, the Khalafs could have looked to it as a source of recovery. They were third-party beneficiaries of the Dullard-National contract, and Dullard owed them a duty to perform the contract with due care. ⁴

The Khalafs on that basis assert that Dullard did or caused an act to be done or "consequences to occur" in Michigan which gave rise to an "action for tort," and therefore the court may exercise long-arm jurisdiction pursuant to clause (2) of the statute:

"The existence of any of the following relationships between an individual or his agent and the state shall constitute a sufficient basis of jurisdiction to enable a court of record of this state to exercise limited personal jurisdiction over the individual and to enable the court to render personal judgments against the individual or his representative arising out of an act which creates any of the following relationships:

"(2) The doing or causing an act to be done, or consequences to occur, in the state resulting in an action for tort." M.C.L. § 600.705; M.S.A. § 27A.705.

The consequence alleged to have occurred in Michigan is that they (Michigan residents) are unable to collect in Michigan or elsewhere the Michigan judgment which they obtained against National. Dullard in Illinois caused that consequence by entering into a contract to procure insurance for National and by negligently performing that contract. The negligent performance provides a basis for maintaining an action for tort.

The Khalafs assert that exercise of jurisdiction by Michigan would be consistent with the "minimum contacts," "traditional notions of fair play and substantial justice" standard declared under the Due Process Clause by the United States Supreme Court. ⁵ Dullard was aware that National had transacted business in at least one state (Wisconsin) other than Illinois before National serviced the press in Michigan. By agreeing to procure and by procuring insurance for a business whose operations he knew extended beyond Illinois, Dullard was involved in the stream of commerce. His deposition indicated that he may have thought the coverage provided by Bankers covered the Khalafs' loss. He should have foreseen that negligent performance of his contract with National could cause loss to a Michigan resident. Michigan has an interest in providing effective means of redress for its residents who would be at a severe disadvantage if required to maintain their action for negligence in procuring insurance in a distant forum. It is therefore fair and reasonable to require Dullard to respond in Michigan.

Dullard counters that the Khalafs' action sounds in contract and therefore is not an "action for tort." The non-collectibility of a judgment is not a "consequence" occurring in this state. A relationship with Michigan such as is required by federal standards was not established: His agreement to procure insurance covering operations beyond Illinois was not a "purposeful availment" ⁶ of the privilege of conducting activities within Michigan such as to render him subject to its process; he could not expect to be plucked from his Chicago office and dropped into the Wayne Circuit Court.

It is unnecessary to decide the statutory issues of whether an action for negligence which sounds in contract is an "action for tort" ⁷ or whether the non-collectibility of a judgment is a "consequence" occurring in this state. ⁸

Proof alone that a non-resident caused an effect in Michigan that was foreseeable does not establish a relationship to Michigan such as to make it fair and reasonable to subject the non-resident to jurisdiction. A non-resident insurance agent is not subject to long-arm jurisdiction in an action for negligent procurement of insurance solely on evidence that i) he knows the insured may engage in activities outside the state in which the insured's activities are generally centered and the agreement to procure insurance was made and ii) he agreed to procure insurance which covered those activities.

III

The United States Supreme Court declared in International Shoe Co. v. Washington ⁹ that, in the context of long-arm jurisdiction, the question under the Due Process Clause is whether the defendant has such "minimum contacts" with the forum that maintenance of the action "(does) not offend 'traditional notions of fair play and substantial justice.' " ¹⁰ This has remained the governing standard in the Court's subsequent pronouncements.

The Court has held that jurisdiction may be maintained in respect to a single act having "substantial connection" with the state. ¹¹ It may also be exercised over causes of action arising "from activities entirely distinct" from the defendant's activities in the forum where the non-resident has an adequate relationship with the state. "(G)eneral fairness to the (defendant) * * * (the) amount and kind of activities * * * mak(ing) it reasonable and just to subject the (defendant) to the jurisdiction of that state are to be determined in each case." ¹²

A factor in the analysis is the state's interest in providing "effective means of redress for its residents." ¹³

It is not enough, however, that the forum state is "the 'center of gravity' of the controversy, or the most convenient location for litigation. The issue is personal jurisdiction, not choice of law. It is resolved in this case by considering the acts of the (defendant)." ¹⁴ Merely because "a State's law can properly be applied to a dispute, its courts (do not) necessarily have jurisdiction over the parties to that dispute." ¹⁵

It is "Essential in each case that there be some act by which The defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its...