Roberts v. Western-Southern Life Ins. Co.

• Decision Date: 29 July 1983
• Docket Number: 82 C 5628.,No. 82 C 6789,82 C 6789
• Parties: Joan Carol ROBERTS, et al., Plaintiffs, v. WESTERN-SOUTHERN LIFE INSURANCE CO., et al., Defendants. UNION NATIONAL BANK OF CHICAGO, Plaintiff, v. UNITED STATES FIRE INSURANCE CO., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

568 F. Supp. 536

Joan Carol ROBERTS, et al., Plaintiffs, v. WESTERN-SOUTHERN LIFE INSURANCE CO., et al., Defendants.

UNION NATIONAL BANK OF CHICAGO, Plaintiff, v. UNITED STATES FIRE INSURANCE CO., et al., Defendants.

Nos. 82 C 6789, 82 C 5628.

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

July 29, 1983.

COPYRIGHT MATERIAL OMITTED

Robert A. Whitebloom and Robert J. Cooley, Chicago, Ill., for plaintiffs in 82 C 6789.

Donald L. Johnson and Marty J. Schwartz, Chicago, Ill., for plaintiffs in 82 C 5628.

James B. Davidson, Peterson, Ross, Schloerb & Seidel, Chicago, Ill., for defendants in 82 C 6789.

Edward P. McNeela, Neal R. Novak, McNeela & Griffin, Ltd., Chicago, Ill., for defendants in 82 C 5628.

MEMORANDUM OPINION

PRENTICE H. MARSHALL, District Judge.

These cases present the question whether an insured person or entity may under Illinois common law maintain a claim against an insurer for its bad faith conduct in handling a claim under an insurance policy. We are invited to reconsider our recent holding in Kelly v. Stratton, 552 F.Supp. 641 (N.D.Ill.1982), that such a common law cause of action exists.

An Illinois statute, Ill.Rev.Stat. ch. 73, § 767 (1981), provides for an award of attorney's fees, costs, and a limited penalty upon a showing that an insurer acted vexatiously and unreasonably in connection with an insurance claim.¹ Some districts of the Illinois Appellate Court have interpreted the most recent version of § 767 as precluding any common law recovery based upon an insurer's bad faith. See Hamilton v. Safeway Insurance Co., 104 Ill.App.3d 353, 60 Ill.Dec. 97, 432 N.E.2d 996 (1st Dist. 1982); Tobolt v. Allstate Insurance Co., 75 Ill.App.3d 57, 30 Ill.Dec. 824, 393 N.E.2d 1171 (1st Dist.1979).² These cases rejected Ledingham v. Blue Cross Plan, 29 Ill.App. 339, 330 N.E.2d 540 (5th Dist.1975), rev'd as to costs, 64 Ill.2d 338, 1 Ill.Dec. 75, 356 N.E.2d 75 (1976), which held that an independent cause of action existed. Another court, in Hoffman v. Allstate Insurance Co., 85 Ill.App.3d 631, 40 Ill.Dec. 925, 407 N.E.2d 156 (2d Dist.1980), while holding that § 767 barred a common law punitive damages claim against an insurer, held that the statute did not limit recovery of common law compensatory damages.

Given the lack of an Illinois Supreme Court ruling on the effect of § 767 and the divergent appellate holdings, the issue we faced in Kelly presented difficult questions of determination of state law under Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The defendant in No. 82 C 6789 has challenged our application of Erie as well as our substantive holding in Kelly. In addition, a recent opinion by our colleague, Judge Milton I. Shadur, provides an extensive critique of our Erie analysis in Kelly. Commercial Discount Corp. v. King, 552 F.Supp. 841, 847-52 (N.D.Ill.1982). These factors militate in favor of a second look at these issues.³

I

The first question is the effect of the various Illinois intermediate appellate decisions concerning § 767. In Kelly, we held that while the appellate court decisions provided "data" for our determination of state law, they were not controlling. Kelly, 552 F.Supp. at 644-45. Rather, we held that we were required to determine how the Illinois Supreme Court would decide the issue. In doing so, we expressed our disagreement with Judge Shadur's analysis of the Erie issue. See, e.g., Slate Printing Co. v. Metro Envelope Co., 532 F.Supp. 431, 434 (N.D.Ill.1982); Bonanno v. Potthoff, 527 F.Supp. 561, 563 (N.D.Ill.1981); Instrumentalist Co. v. Marine Corps League, 509 F.Supp. 323, 329 (N.D.Ill.1981); National Can Corp. v. Whittaker Corp., 505 F.Supp. 147, 148-49 n. 2 (N.D.Ill.1981). In those cases, as in Commercial Discount, Judge Shadur held that a court of this district, in determining state law, must act as a state trial court. Where the various Illinois appellate districts are in conflict, Judge Shadur further held, a judge of the Northern District of Illinois must apply the law of the First District of the Illinois Appellate Court, the appellate district in which this federal district court sits. In Commercial Discount, he noted that were a case to be presented in which the proper Illinois venue was other than the First District, then the law of the district of proper venue must be applied. Commercial Discount, 552 F.Supp. at 850.⁴

It is true, as Judge Shadur suggests, that we must avoid applying a rule that would permit a litigant to forum shop by choosing to bring his action in federal court if he found the law of the relevant state appellate district unfavorable, hoping to find a more sympathetic ear on the federal bench. See Bernhardt v. Polygraphic Co. of America, Inc., 350 U.S. 198, 203-04, 76 S.Ct. 273, 276-77, 100 L.Ed. 199 (1956); Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). However, we think that Commercial Discount begins with an erroneous premise: that a federal court sitting in diversity jurisdiction "must decide substantive questions ... in the same way that a state trial judge counterpart sitting at the same location would." Commercial Discount, 552 F.Supp. at 847 (quoting National Can Corp. v. Whittaker Corp., 505 F.Supp. 147, 148 n. 2 (N.D.Ill.1981)) (emphasis supplied). The error of this premise affects the remainder of the Commercial Discount analysis.

The proposition that we must act as state trial judges stems from a misapprehension of the commands of Erie and its progeny. Erie requires a federal court to apply the substantive law of the forum state; we take this to mean that we must apply the law that ultimately would be applied were the case to be litigated in the state courts. While intermediate appellate decisions exert upon us a high degree of persuasive force, and while they may be binding upon state trial courts, the law we must apply is that which the state supreme court would apply.⁵ In a given case we may choose to follow an intermediate appellate ruling, but we may not end our analysis of state law with mere citation to such rulings where we are persuaded that the state supreme court would rule otherwise. See generally In re Air Crash Disaster Near Chicago, Illinois on May 25, 1979, 701 F.2d 1189, 1196-98 (7th Cir.1983) (Appeal of American Airlines, Inc.).

The policy behind this principle is Erie's concern with avoiding forum shopping between state and federal courts. Applying the law that the state supreme court would follow is necessary if we are to avoid creating an incentive for such forum shopping. The "state trial court" approach creates an incentive for forum shopping in that it requires the federal courts to give more weight to state intermediate appellate decisions than they would be given in the state system. This may be illustrated by three examples.

In a case in which no supreme court decision exists and the appellate district of proper state venue has not yet taken a position on an issue, Commercial Discount would require a federal court to follow the law as declared by the other appellate districts. Commercial Discount, 552 F.Supp. at 848 (citing People v. Thorpe, 52 Ill. App.3d 576, 579, 10 Ill.Dec. 351, 354, 367 N.E.2d 960, 963 (2d Dist.1977) and Garcia v. Hynes & Howes Real Estate, Inc., 29 Ill. App.3d 479, 482, 331 N.E.2d 634, 636 (3d Dist.1975)). However, the very fact that the various Illinois appellate districts sometimes conflict on an issue of law indicates the problem inherent in the state trial court approach. The appellate districts, it appears, do not consider each others' decisions binding; rather, they regard them as persuasive authority only. Thus, if a litigant filed suit in a state court in the First District and the only intermediate appellate decision on a pertinent issue was from the Fourth District, while the trial court presumably would follow the Fourth District ruling, on appeal the First District would not necessarily do so, if it found persuasive reasons to do otherwise. In such a case, if diversity of citizenship existed, the litigant favored by the Fourth District rule could file the case in federal court (or remove it, if there was diversity of citizenship, in the case of a non-Illinois defendant) and thereby obtain "insurance" that the favorable rule of law would be applied and upheld on appeal, were Commercial Discount to apply.

The same is true even where "First District law" exists. The First District has five divisions. It appears that the different divisions do not consider themselves bound by the holdings of other divisions. See, e.g., Bonnano v. Potthoff, 527 F.Supp. 561, 563-64 (N.D.Ill.1981) (Shadur, J.) (discussing conflicting holdings of Third and Fifth Divisions on issue of date of accrual of cause of action); Commercial Discount, 552 F.Supp. at 843-45 (discussing apparent difference in decisions in different divisions on question of effect of failure to give notice of sale of repossessed goods).⁶

To note an example of recent origin, a controversy existed within the First District over the question whether a prosecutor must justify his or her use, within a particular case, of peremptory challenges to exclude minority group members from a jury. Compare People v. Gosberry, 109 Ill.App.3d 674, 65 Ill.Dec. 99, 440 N.E.2d 954 (1st Dist., 3d Div.1982) and People v. Payne, 106 Ill. App.3d 1034, 62 Ill.Dec. 744, 436 N.E.2d 1046 (1st Dist., 3d Div.1982) with People v. Newsome, 110 Ill.App.3d 1043, 66 Ill.Dec. 708, 443 N.E.2d 634 (1st Dist., 2d Div.1982) and People v. Teague, 108 Ill.App.3d 891, 64 Ill.Dec. 401, 439 N.E.2d 1066 (1st Dist., 1st Div.1982). Because one division does not consider itself bound by the others' holdings,⁷ application of the "law" of the First District where not all divisions have spoken may result in a litigant obtaining a result that would not obtain were the case to be litigated in state court.⁸ Commercial Discount, therefore, permits a diversity...