Mizuho Corporate Bank (Usa) v. Cory & Associates, Inc., 02-1126.

• Decision Date: 29 August 2003
• Docket Number: No. 02-1210.,No. 02-1126.,02-1126.,02-1210.
• Citation: 341 F.3d 644
• Court: U.S. Court of Appeals — Seventh Circuit
• Parties: MIZUHO CORPORATE BANK (USA), Plaintiff-Appellee, v. CORY & ASSOCIATES, INC., Defendant-Third Party Plaintiff-Cross-Appellant, v. Swett & Crawford of Illinois, Inc. (f/ k/a Insurance Brokers Service, Inc.), Third-Party Defendant-Appellant, v. Travelers Indemnity Company, Third-Party Defendant-Cross-Appellee.

341 F.3d 644

MIZUHO CORPORATE BANK (USA), Plaintiff-Appellee, v. CORY & ASSOCIATES, INC., Defendant-Third Party Plaintiff-Cross-Appellant, v. Swett & Crawford of Illinois, Inc. (f/ k/a Insurance Brokers Service, Inc.), Third-Party Defendant-Appellant, v. Travelers Indemnity Company, Third-Party Defendant-Cross-Appellee.

No. 02-1126.

No. 02-1210.

United States Court of Appeals, Seventh Circuit.

Argued December 5, 2002.

Decided August 29, 2003.

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Frank H. Penski, Nixon & Peabody, New York, NY, for Plaintiff-Appellee/Plaintiff.

James N. Nowacki, Kirkland & Ellis, Chicago, IL for Defendant-Appellant.

Mitchell A. Orpett, Tribler, Orpett & Meyer, Chicago, IL, for Defendant-Appellee.

Marc D. Fisher, Chicago, IL, for Defendant.

Peter E. Kanaris, Daar, Fisher, Kanaris & Vanek, Chicago, IL, for Defendant-Appellee.

Before BAUER, DIANE P. WOOD, and WILLIAMS, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

Insurance is meant to cushion the blow caused by a disaster; it is supposed to be part of the solution, not part of the problem. In this case, however, the contest is over who was responsible for inadequacies in the insurance policy itself, and who must bear the uncovered losses. In general terms, this litigation arose out of the bankruptcy proceeding of the under-insured party, Cyberstar and Caribbean Communications (CCC). One of CCC's creditors (International Bank of Japan, or IBJ¹) sued the retail insurance broker (Cory & Associates, or Cory) that had procured the policy, and it in turn impleaded the wholesale broker (Insurance Broker Services, Inc., or IBSI) and the ultimate insurer (Travelers Indemnity Company, or Travelers). One of the issues we are considering on appeal concerns the effect of a settlement between IBJ and Cory in the main action on the eve of trial. The district court ruled that this settlement resolved all issues conclusively with respect to Cory's alleged responsibility for the expensive mishap, and it therefore limited the trial to the question whether there was a fiduciary relationship between Cory and IBSI. The jury decided that there was, and thus stuck IBSI with the responsibility of paying the entire amount (some $20 million) reached in the settlement agreement. IBSI has appealed, claiming that this was error. The district court should not have so restricted the trial, and we therefore remand for further proceedings. The second major point concerns the correctness of the district court's decision to grant summary judgment in favor of Travelers. We affirm the court's ruling that Travelers was entitled to summary judgment.

I

At the heart of this case is a simple but expensive communication failure. In early 1995, CCC retained Cory to set up insurance coverage in connection with CCC's impending purchase of a cable television operation in the U.S. Virgin Islands. Cory initially attempted to arrange coverage directly, but ultimately it turned the placement over to IBSI, which it thought would be better able to make sophisticated placements of the sort CCC needed. IBSI, which had a longstanding relationship with Travelers under a "Wholesale Broker Agreement," immediately identified Travelers as one potential underwriter for the requested coverage. Under that agreement, IBSI was authorized to undertake a variety of tasks on behalf of Travelers, including the solicitation of applications, the collection of premiums, and the holding of funds on behalf of and as a fiduciary of Travelers. Furthermore, the agreement provided for the payment of commissions to IBSI. The agreement did not, however, authorize IBSI to issue insurance binders and specifically disavowed any agency relationship between the two entities.

Over the course of several months, Cory and IBSI negotiated the terms and conditions of the requested coverage with at least two different insurance carriers, including Travelers. IBSI obtained several price quotations, and the parties passed the information up and down the chain of command. Thus, the price quotations issued by Travelers went first to IBSI, then to Cory, and finally to CCC. Ultimately, CCC assented to the terms of the Travelers policy and, speaking through Cory, gave IBSI instructions to bind. IBSI, after consultation with Travelers, responded with copies of a placement note.

The coverage negotiated by IBSI and Travelers became effective on July 31, 1995. Six weeks later, Hurricane Marilyn swept through the U.S. Virgin Islands and did substantial damage to CCC's newly purchased cable facilities. When CCC attempted to recover from Travelers for the damage to the Caribbean facilities, a critical misunderstanding came to light. CCC thought that Cory, on its behalf, had entered into an insurance contract with Travelers with coverage of nearly $8 million; Travelers took the position that the IBSI-brokered policy set a cap on coverage at $2.5 million. Travelers ultimately paid CCC $2.5 million; the more than $5 million shortfall forced CCC into bankruptcy. A liquidation followed in April 1996, in which all CCC stock and claims were assigned to IBJ, one of CCC's principal lenders.

Although a detailed post-mortem of the coverage dispute is unnecessary for the purposes of the present appeal, an understanding of the possible reasons for the miscommunication may help to shed light on the analysis to come. One possible source of the problem was that Cory and IBSI negotiated the terms and conditions of the Travelers coverage, but at no point did CCC, Cory, or Travelers communicate directly with one another. Instead, IBSI remained the middleman throughout. In addition, at critical points IBSI took documents prepared by Travelers and incorporated their substance into its own documents, which it then used to communicate terms and conditions to Cory. As a result, the critical terms and conditions of the insurance coverage moved up and down the chain in different document formats. Finally, Travelers did not deliver the final paper policy to CCC until several weeks after the hurricane. In short, the parties were not, either literally or figuratively, on the same page. Another possible reason for the miscommunication was that the postponement of CCC's acquisition of the Caribbean-based cable facilities necessitated two separate rounds of bids from prospective insurers. Prior to the delay in the facilities acquisition, a competing insurer had quoted a premium of $100,000 for $5 million in coverage. The ISBI-communicated premium from Travelers of $115,005 might have seemed to reflect coverage of the nearly $8 million that Cory thought it had requested and that CCC thought it was getting.

In August 1997, IBJ filed suit against Cory on behalf of all lender banks as assignee of CCC, claiming negligence, breach of fiduciary duty, breach of contract, and negligent misrepresentation. In turn, Cory filed third-party complaints against IBSI and Travelers. The portion of the third-party complaint that was directed against IBSI closely resembled IBJ's amended complaint against Cory. The first three of the five IBSI counts were specifically labeled "contribution" and included theories of negligence (Count I), breach of fiduciary duty (Count II), and negligent misrepresentation (Count III). The remaining two counts against IBSI contained no such labels and included theories of breach of fiduciary duty (Count IV) and breach of contract (Count V). The portion of the third-party complaint directed against Travelers sought reformation (Count VI) and raised theories of breach of contract (Count VII), tortious breach of contract (Count VIII), and negligence based on agency principles and respondeat superior (Count IX).

After more than a year of litigation, Travelers moved under FED. R. Civ. P. 12(b)(6) to dismiss the remaining claims Cory was asserting against it. The district court granted the motion with respect to the reformation claim, but it denied at that time to resolve the breach of contract and respondeat superior theories. Travelers had better luck more than two years later when it moved for summary judgment on the remaining counts. At that point, in an order dated May 10, 2001, the court granted summary judgment in favor of Travelers, reasoning that Cory lacked the requisite standing for the breach of contract claims because it could not plausibly claim status as a third-party beneficiary of the Travelers-CCC insurance contract and that there was no agency relationship between IBSI and Travelers that could support a theory of respondeat superior liability.

On May 18, 2001, with trial rapidly approaching, IBJ and Cory reached an agreement settling IBJ's claims. The settlement agreement fixed the total amount of IBJ's claims at $20,367,519. It contained a complicated formula for the satisfaction of that claim by Cory, whereby a graduated percentage of the money recovered by IBJ from IBSI would be allocated back to Cory as a credit against the $4 million it had agreed to pay to IBJ under the settlement agreement, up to a maximum of $4,375,000. Under the terms of this agreement, a large recovery by IBJ against IBSI would actually produce a net gain to Cory of $375,000. It is this part of the settlement that IBSI has labeled a "kickback" provision.

IBSI objected to the settlement on reasonableness grounds and moved to dismiss the claims assigned to IBJ by Cory as part of the settlement agreement for failure to state a claim. The district court granted partial relief in a June 6 order, which dismissed all but two claims. The court first noted that Cory had not pursued Counts I and III, which it concluded were both barred anyway by the Illinois Joint Tortfeasor Contribution Act, 740 ILCS 100/1 et seq. As for Count II, there was no problem under the Joint Tortfeasor Act because as a breach of fiduciary duty claim it did not fall under that statute. The court found in IBSI's favor, however, because the Illinois Insurance Placement Liability Act (IPLA), 735 ILCS...