Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

WILDER CORPORATION OF DELAWARE v. THOMPSON DRAINAGE AND LEVEE DISTRICT (September 27, 2011)

Wilder Corporation owned several thousand acres of farmland on the Illinois River in Fulton County, Illinois. It sold the land in 2002 to The Nature Conservancy, which intended to restore it to an ecologically functional floodplain. Wilder warranted that the land was not contaminated by petroleum. Unfortunately, Wilder was wrong and the property was contaminated, apparently as a result of the local drainage district’s use and storage of petroleum on the property. The Conservancy sued Wilder for breach of contract and obtained a judgment for several hundred thousand dollars. Wilder brought suit against the drainage district, seeking indemnification for the damages it was ordered to pay the Conservancy. Judge Mihm (C.D. Ill.) granted summary judgment to the Conservancy. Wilder appeals.

In their opinion, Seventh Circuit Judges Posner, Flaum, and Hamilton affirmed. The Court briefly explored the common law of indemnity. It noted that the most common form of indemnity is contractual, as in an insurance policy. There is also non-contractual indemnity, as in where tort liability is shifted from a blameless person to a blameworthy one. Here, however, Wilder wants to shift its contractual liability on the theory that it was blameless and that the drainage district was blameworthy for the petroleum contamination. But the doctrine of indemnity simply does not apply in a situation like this. The district had no control over what warranties Wilder gave to the Conservancy. Furthermore, Wilder could have insisted on a subrogation clause, in which case he could have stepped into the Conservancy's shoes in a nuisance claim against the district. Having failed to do so, it cannot shift the liability to the district. The Court noted that the suit was also barred by the economic-loss doctrine.

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UNIVERSAL MORTGAGE CORP. v. WURTTEMBERGISCHE VERSIGHERUNG AG (July 11, 2011)

Ray Hightower worked for Universal Mortgage Corp., a company that originated mortgage loans and sold them to investors. When Universal sold the loans, it warranted that the loans complied with the Federal National Mortgage Corporation standards. For over a year, Hightower took kickbacks from an outside broker in return for ensuring that Universal approved non-compliant loans. Universal sold the loans without knowledge of their non-compliant status. Some of the loans went into default. When those investors realized that Universal had breached its compliance warranty, they exercised their rights to force Universal to repurchase the loans. Universal estimates that its exposure will be $4.5 million. Universal filed a claim under its bankers blanket bond issued by a consortium of Lloyds of London underwriters. The bond indemnified Universal for "[d]irect financial loss" it suffered "by reason of and directly caused by . . . dishonest acts by any Employee." The bond also excluded any loss "resulting from" a loan repurchase from an investor. The underwriters denied the claim. Universal brought suit for breach of contract and bad faith denial of an insurance claim. Judge Stadtmueller (E.D. Wis.) granted a motion to dismiss, concluding that Hightower's fraud did not "directly cause" the loss and that the repurchase exclusion applied. Universal appeals.

In their opinion, Judges Posner, Flaum, and Sykes affirmed. The Court noted that the bond form has been around for decades and that many of its terms have well-established meanings. But two camps have emerged on the proper meaning of "directly cause." One camp has adopted the proximate cause principle from tort law. But this case is governed by Wisconsin law, and Wisconsin has adopted a "direct means direct" definition of "directly cause." Here, Universal's liability is to a third party. Even if its loss from that liability is due to employee misconduct, the employee misconduct did not "directly cause" the loss. The Court rejected Universal’s argument that its loss arose when it initially approved the non-compliant loans. Even if it did, it recovered that loss when it sold the loans to investors. The loss it now seeks to recover is the loss from its obligation to those investors. Alternatively, the Court agreed with the district court that the repurchase exclusion applied and barred coverage.

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BRENNAN v. CONNORS (June 30, 2011)

For several years in the 1990s, attorney Edward Brennan represented tennis legend Jimmy Connors. Brennan's law firm dissolved in 1997. The next year, Brennan sued Connors, alleging that Connors terminated their agreement without fulfilling his obligations. Connors settled that suit years later for over $10 million. The settlement agreement contained an indemnification clause, pursuant to which both Brennan and Connors indemnified the other. Shortly after the settlement, Brennan's former law partner sued him. He alleged that Brennan committed fraud and breached his fiduciary duty by delaying Connors' payment until the firm dissolved. Brennan then sued Connors for a declaration that Connors should indemnify him for any liability he owed to his former partner. Judge Murphy (S.D. Ill.) dismissed the complaint, finding a) the indemnification failed because of its "infinitely repeating loop," b) contractual indemnification for intentional misconduct generally violates Illinois’ public policy, and c) the indemnification did not fit into any exception to the general rule. Brennan appeals.

In their opinion, Judges Bauer, Flaum, and Evans affirmed. The Court disagreed with the district court's interpretation of the contract. Instead of a repeating loop, the Court concluded that a better interpretation was that the indemnity language referred back to the first sentence of the agreement. In that sentence, both Connors and Brennan warranted that each was the sole owner of the rights at issue in the litigation. Therefore, the indemnification only kicked in if a third party claimed to be an assignee of one of them – which was not the case here. Alternatively, the Court held that the indemnity was unenforceable because Illinois public policy prohibits indemnities for intentional misconduct. The Court found Brennan's argument that indemnities for intentional past conduct are enforceable unsupported in Illinois law.

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R. R. STREET & CO. v. VULCAN MATERIALS CO. (June 25, 2009)

R. R. Street has been the exclusive distributor for a dry cleaning solvent manufactured by Vulcan since 1961. Street alleges that Vulcan promised, in 1992, to and indemnify and defend Street for claims brought with respect to the solvent. Several lawsuits of that type are now pending against both Street and Vulcan. Several of Vulcan's insurers, including National Union, brought suit in California for a declaration that they are not required to defend Vulcan. National Union is also Street's insurer and has been defending Street in those lawsuits because Vulcan has refused to do so. Street and National Union sued Vulcan for breach of contract, promissory estoppel and indemnity. In addition, they asserted a claim for a declaration that Vulcan must defend and indemnify Street. Vulcan moved to either dismiss or stay the case pending resolution of the California case. The district court dismissed the case pursuant to theWilton/Brillhart doctrine. Vulcan appeals.

In their opinion, Judges Manion, Rovner and Tinder reversed and remanded. The Court noted that the relief provided in the Declaratory Judgment Act is discretionary. In Wilton and Brillhart, the Supreme Court held that district courts had much discretion in deciding whether to even entertain a declaratory judgment action. It is undisputed, the Court continued, that a district court can dismiss a complaint where only declaratory relief is requested. Here, however, plaintiffs seek both declaratory and non-declaratory relief. The Court noted that it had never ruled on that issue -- although several other courts of appeal had. The Fifth Circuit holds that Wilton/Brillhart is inapplicable when a non-frivolous claim for non-declaratory relief is present. The Second, Tenth and Fourth Circuits endorse similar results. The Ninth Circuit, on the other hand, rejects a bright line rule. It first asks whether non-declaratory claims exist that are independent of the declaratory relief requested. Independent claims are those that have a separate basis for jurisdiction and that can be resolved without the declaratory relief. If these independent claims exist, at least in the Ninth Circuit, the district court has almost no discretion to refuse to entertain them. The Court, upon reflection, thought the Ninth Circuit's approach was preferable and adopted a test whereby a district court should first determine whether the non-declaratory claims are independent of the declaratory claims. The Court defined "independent claim" as one which has its own jurisdictional basis and is viable without regard to the declaratory claim. If the non-declaratory claims are independent, Wilton/Brillhart doctrine should not be applied and the court should hear the claims. A court should also retain the declaratory claims for the sake of efficiency. Here, the non-declaratory claims are independent -- the district court would have diversity jurisdiction over the claims and declaratory relief is not a prerequisite for the resolution of the claims. The district court should have retained both the non-declaratory and declaratory claims.

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