State Sec. Ins. Co. v. Frank B. Hall & Co., Inc.

• Decision Date: 31 December 1981
• Docket Number: No. 81 C 4167.,81 C 4167.
• Citation: 530 F. Supp. 94
• Parties: STATE SECURITY INSURANCE COMPANY, etc., Plaintiff, v. FRANK B. HALL & COMPANY, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

530 F. Supp. 94

STATE SECURITY INSURANCE COMPANY, etc., Plaintiff, v. FRANK B. HALL & COMPANY, INC., et al., Defendants.

No. 81 C 4167.

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

December 31, 1981.

Robert A. Holstein, John M. Mack, Heidi M. Streeky, Holstein, Mack & Associates, Chicago, Ill., for plaintiff.

Terry M. Grimm, Duane M. Kelley, James R. Vogler, Steven G. Goldberg, Winston & Strawn, Chicago, Ill., for Frank B. Hall & Co.

John T. Wardrope, Sandra Young, Purcell & Wardrope, Chicago, Ill., for Thompson, Coe.

Ronald Butler, Gerald G. Saltarelli, Butler, Rubin, Newcomer & Saltarelli, Chicago, Ill., for Mendel S. Kaliff.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

State Security Insurance Company ("State Security") sues a number of corporate and individual defendants on behalf of itself and others it claims are similarly situated, based on common law fraud, conspiracy, contract and agency theories. It asserts a Texas-based insurance fraud of Texas-sized proportions, with an alleged peripheral impact in Illinois.

All the non-corporate defendants have moved for dismissal under Fed.R.Civ.P. ("Rule") 12(b)(2) for want of personal jurisdiction:

(1) 18 current or former directors, officers or employees of Frank B. Hall & Co. Inc. of Texas ("Hall of Texas") or its New York-based parent company, Frank B. Hall & Co. Inc. ("Hall");

(2) Mendel Kaliff ("Kaliff"), president of Morris H. Kaliff & Son Insurance Agency, Inc. ("Kaliff & Son") until its acquisition by Hall of Texas in July 1975 when he became president of Hall of Texas;

(3) a Dallas law firm, Thompson, Coe, Cousins & Irons ("Thompson, Coe").

After a brief summary of the relevant facts, this opinion will review the claims separately. Although the involvements of the several defendants differ substantially, bringing different legal principles into play, each is entitled to dismissal.

Facts¹

Hall is a Delaware corporation with principal offices in Briarcliff Manor, New York. Hall of Texas is a subsidiary of Frank B. Hall & Co. Brokerage, Inc., which is in turn a Hall subsidiary.

On July 8, 1975 Hall of Texas purchased the assets of Kaliff & Son, a San Antonio, Texas insurance agency. Two weeks later Hall of Texas and State Security entered into a "Surplus Lines General Agency Agreement" (the "Agreement"), under which Hall of Texas as agent for State Security was to sell the latter's policies of insurance. That Agreement was the product of prior negotiations between Kaliff & Son and State Security antedating the Hall of Texas acquisition.

In the summer of 1978 "certain practices of the San Antonio office involving the writing and reporting of carnival insurance were brought to the attention of Hall's management."² Hall's board of directors ordered an investigation and then instituted a program of restitution under the supervision of the Texas Commissioner of Insurance. Both the investigation and the restitution program, which State Security claims was perhaps fraudulent and at least negligent, were carried out with the assistance of Thompson, Coe and another defendant, accounting firm Touche Ross & Co., Inc. ("Touche Ross").³ As a result of the restitution program about $3 million was returned to various insurance carriers and insureds.⁴

This opinion assumes arguendo that the non-corporate defendants' involvement was as State Security claims:

(1) All 18 Hall director-officer-employees, acting in their respective capacities, took an active role in the illegal behavior of which State Security complains.

(2) Kaliff, as president of Kaliff & Son and then as president of Hall of Texas, was also an active participant in the alleged scheme to defraud.

(3) Thompson Coe was a willing and active participant as well.

Exercise of In Personam Jurisdiction Generally

No federal statute prescribes the manner of service of process in diversity actions. Rule 4(d)(7) requires then that this Court look first to the Illinois rules governing exercise of in personam jurisdiction over nonresident defendants. Forty-Eight Insulations, Inc. v. Johns-Manville Products Corp., 472 F.Supp. 385, 389 (N.D.Ill.1979).

That inquiry — whether the Illinois long-arm statute (Ill.Rev.Stat. ch. 110, § 17 "Section 17") authorizes service of process on a defendant — does not end the analysis. There must be an affirmative answer to both that question and the question whether the proposed exercise of personal jurisdiction comports with the due process requirements of International Shoe Co. v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945) and its progeny.

Until very recently that two-step inquiry had telescoped into one, for the Illinois Supreme Court had consistently said the Illinois General Assembly intended to extend the reach of Section 17 to the outermost boundaries permitted by the Due Process Clause. Braband v. Beech Aircraft Corp., 72 Ill.2d 548, 557, 21 Ill.Dec. 888, 896, 382 N.E.2d 252, 256 (1978), cert. denied, 442 U.S. 928, 99 S.Ct. 2857, 61 L.Ed.2d 296 (1979); Nelson v. Miller, 11 Ill.2d 378, 389, 143 N.E.2d 673, 679 (1957). Under that concept the preliminary question of Illinois law had merged with the federal constitutional question. Wisconsin Can Co. v. Banite, Inc., 88 F.R.D. 597, 600 (N.D.Ill.1980).

Now however the Illinois-federal correlation is less than one-to-one. In the October 1981 decision in Green v. Advance Ross Electronics Corp., 86 Ill.2d 431, 436-37, 56 Ill.Dec. 657, 663-64, 427 N.E.2d 1203, 1206 (1981), Justice Simon wrote for a unanimous Illinois Supreme Court:

We do not, however, regard this observation in Nelson v. Miller as the equivalent of declaring that the construction and application of section 17(1)(b) depend entirely upon decisions determining in what circumstances due process requirements would permit long-arm jurisdiction. Neither do we read Nelson to say that in applying section 17(1)(b) we should not construe the meaning and intent of our own statute irrespective of the due process limitations generally applicable to State long-arm statutes. A statute worded in the way ours is should have a fixed meaning without regard to changing concepts of due process, except, of course, that an interpretation which renders the statute unconstitutional should be avoided, if possible. Thus, instead of turning to the array of tests which have been articulated to assist in determining whether long-arm statutes as applied exceed permissible constitutional boundaries, we prefer to resolve this appeal by looking to the meaning of our own statute. We determine first whether it should be construed in a way which embraces defendants' claim against Green, Sr. If the answer is in the negative, as we conclude it is, applying the tests the Supreme Court has fashioned in the following decisions to determine whether the assertion of jurisdiction by a State over a nonresident is prohibited by due process safeguards is unnecessary. Citing International Shoe and its progeny.

Because Green is too new a decision for its boundaries to be clearly visible,⁵ one section of this opinion (that relating to Thompson, Coe) will in part reverse the two-step analysis. It will first examine whether Illinois process can constitutionally reach the out-of-state non-corporate law firm. Any negative answer to that question would then be supported a fortiori by Green,⁶ but the Court will then consider the effect of Green taken alone.

Hall's Directors, Officers and Employees

All 18 Hall directors, officers and employees assert that the "fiduciary shield" insulates them from suability in a jurisdiction like Illinois, where their sole contacts have been on behalf of their corporation. That doctrine has been succinctly summarized just last month in Marine Midland Bank, N.A. v. Miller, 664 F.2d 899 at 902 (2d Cir. 1981):

The teaching of the courts of this Circuit and of New York is that there is a dichotomy between the principles governing the personal liability of corporate agents for torts committed in their corporate roles and the principles governing the amenability of such agents to personal jurisdiction solely on the basis of those acts. Citing cases. These cases have recognized that if an individual has contact with a particular state only by virtue of his acts as a fiduciary of the corporation, he may be shielded from the exercise, by that state, of jurisdiction over him personally on the basis of that conduct. Thus, his conduct, although it may subject him to personal liability, may not form the predicate for the exercise of jurisdiction over him as an individual. The underpinning of this fiduciary shield doctrine is the notion that it is unfair to force an individual to defend a suit brought against him personally in a forum with which his only relevant contacts are acts performed not for his own benefit but for the benefit of his employer.

To be sure, not all courts embrace the fiduciary shield doctrine (whether or not bearing that label) wholeheartedly.⁷ But what is significant here is that recent Illinois cases have adopted and applied its precepts consistently. Mergenthaler Linotype Co. v. Leonard Storch Enterprises, Inc., 66 Ill.App.3d 789, 797, 23 Ill.Dec. 352, 360, 383 N.E.2d 1379, 1385 (1st Dist. 1978); Hurletron Whittier, Inc. v. Barda, 82 Ill.App.3d 443, 447, 37 Ill.Dec. 838, 842, 402 N.E.2d 840, 843 (1st Dist. 1980); see also Insull v. New York World-Telegram Corp., 172 F.Supp. 615, 634 (N.D.Ill.1959), aff'd 273 F.2d 166 (7th Cir. 1959).

Thus if the Marine Midland Bank view of the doctrine is taken (under which it represents a judicial construction of the long-arm statute), the first step of the usual two-part analysis ends the inquiry: Illinois would not permit the use of Section 17 to hale the 18 individuals into court here for actions taken solely in their representative capacities. And if the issue is rather perceived in terms of due process (the second step of the two-part inquiry), this Court finds the prevailing...