Court Opinion

ID: 767223
Source: CourtListenerOpinion
Date Created: 2012-04-18 08:29:06+00
Date Added: 2024-06-11T12:12:25.211880
License: Public Domain

200 F.3d 479 (7th Cir. 2000)
BANKRUPTCY ESTATE OF LAKE GENEVA SUGAR  SHACK, INCORPORATED, a Wisconsin corporation,  and BANKRUPTCY ESTATE OF DANA MONTANA,    Plaintiffs-Appellants,v.GENERAL STAR INDEMNITY COMPANY,    Defendant-Appellee.
No. 99-1321
In the  United States Court of Appeals  For the Seventh Circuit
Argued November 4, 1999Decided January 11, 2000

Appeal from the United States District Court  for the Eastern District of Wisconsin.  No. 91 C 163--Lynn Adelman, Judge.
Before MANION, KANNE, and EVANS, Circuit Judges.
EVANS, Circuit Judge.

1
This is a diversity case  based on the Wisconsin tort of bad faith in  denying insurance coverage. The district court  granted the motion of the General Star Indemnity  Company (GenStar) for summary judgment and  dismissed the case on the basis of claim  preclusion. Bankruptcy Estate of Lake Geneva  Sugar Shack, Inc. v. General Star Indemnity Co.,  32 F. Supp. 2d 1059 (E.D. Wis. 1999). The issue  before us is whether this action is barred by a  judgment in a case brought by the insurer in  Walworth County, Wisconsin, a case in which  counterclaims were filed, including one for  breach of the contract.

2
The Lake Geneva Sugar Shack, Inc. is a  Wisconsin corporation that operated the Sugar  Shack nightclub in Lake Geneva, Wisconsin. Dana  Montana was the sole shareholder and principal  officer of the corporation. The Sugar Shack  purchased insurance from General Star in July  1989. In February 1990 a fire substantially  damaged the building, and within 24 hours GenStar  announced that it intended to deny coverage  because it concluded that Montana was somehow  involved in starting the fire. GenStar suspected  that Montana had a financial motive to burn the  building and it ordered a financial background  check, which confirmed that the building was  mortgaged and that the mortgage was cross-  collateralized with other properties, including  Montana's home. As a result of GenStar's advising  the mortgage company that Montana set the fire,  Montana lost a refinancing of her properties  which had been approved. The building was  demolished and the mortgagee foreclosed on her  other properties, which were worth $3.327  million.

3
But GenStar did not formally deny coverage  until after 11 months of investigation. During  that time, which Montana contends was dragged out  in an attempt to deplete her financial resources,  GenStar refused to reinstate coverage and refused  to refund her premiums.

4
GenStar brought a declaratory judgment action  against the Sugar Shack and Montana in the  Walworth County circuit court, seeking to  dissolve the insurance agreement. GenStar accused  Montana of fraud, breach of the policy agreement,  and other dastardly deeds. Sugar Shack and  Montana then filed the present action in federal  court, alleging claims of breach of contract and  bad faith. The late Judge Robert W. Warren, to  whom the case was assigned, stayed the federal  action pending resolution of the state court  case. In granting the stay request, Judge Warren said:

5
If the court stays the action, it will be able  to rely on the state court's findings of fact  instead of eliciting the facts contemporaneously  alongside the state court in two separate  proceedings. Any state court finding will reduce  the amount of litigation in a parallel federal  matter. If Montana prevails, she will not only be  able to have her day in court, but she will be  leveraged into a better bargaining position if  she chooses to settle out of court. If General  Star prevails, Montana's claim will be mooted  without both parties having to go through another  expensive, time-consuming procedure.

6
After the stay was entered, Montana (from here on, we will often refer to the plaintiffs simply  as Montana) attempted to obtain a stipulation to  consolidate all of her claims in the federal  action with the Walworth County action. GenStar refused to consolidate the bad faith claim but  agreed to consolidate the vicarious liability and  breach of contract claims. The stipulation as to the latter claims was entered.

7
In January 1994 Judge Warren inquired into the status of the federal action. GenStar responded,  in writing, as follows:

8
As all matters that were initially embraced in  the federal court action have been embraced in  the state court action, I see no reason why the  federal court action can not simply be dismissed.

9
Montana did not agree, and she wrote this letter to Judge Warren:

10
In no event, should this matter be dismissed as  the Walworth County action does not contain the  same causes of action as this case. . . . A  dismissal of this action would seriously  prejudice the plaintiffs' rights because it would  create statute of limitations problems for the  causes of action pled in this case that were not  contained in the Walworth County case.  Specifically, the plaintiffs' Complaint contains  a cause of action for bad faith which has never  been alleged in the Walworth County case.

11
Judge Warren responded by closing the case  administratively1 but saying:

12
Nothing herein should be considered a dismissal  or disposition of this matter, however, and  either party may reopen the case at any time by  advising the court and opposing counsel in  writing that further proceedings are desired.

13
On January 11, 1994, Montana's attorney, Christopher Hale, appeared in Walworth Count  court and said he was considering bringing a  motion to assert a bad faith claim in that court.  GenStar contends that Hale expressly acknowledged  at the January hearing the risk of his bad faith  claim being barred by claim preclusion if he did  not file it in Walworth County. But Montana contends that Hale was only concerned about the  statute of limitations. Montana has the better of this dispute, both on the record and because of  the principle that for purposes of summary  judgment, disputes of fact are resolved in favor  of the nonmovant. The transcript shows:

14
THE COURT:  Well, first of all, Bad Faith wouldn't be an issue in this case, would it? It  would come after a decision is rendered in the  case it would seem to me. In other words, you've got a new lawsuit. Question arises whether his objection to the statute or not would survive--  that would--I can't see how that issue would come  up here until it was a judgment in this case.

15
MR. HALE:  I think the law is, your Honor, and  Mr. Baxter will correct me, that when facts  giving rise to evidence that there was not a  reasonable basis at the time of the denial of  coverage that at that point in time your cause of  action for Bad Faith accrues and you have two  years to bring it and I think the case law has  Bad Faith claims in trials like this where they  are tried together with the arson case itself.

16
Hale was clearly discussing the statute of  limitations, not claim preclusion.

17
Sugar Shack and Montana filed for bankruptcy in  September 1994, which automatically stayed the  Walworth County case. GenStar moved to lift the  stay. Montana wanted to consolidate the Walworth  County coverage claim with the federal bad faith  claim under 28 U.S.C. sec. 1452(a), providing for  removal of claims related to bankruptcy cases.  However, instead, the bankruptcy court lifted the stay; plaintiffs appealed again, arguing for one  forum, the federal forum. On appeal to the district court, GenStar again opposed the  request, saying:

18
As set forth in the Decision . . . Judge Warren  realized the state law nature of those claims,  and stayed further proceedings in the Federal  Court Action until conclusion of the Walworth  County Action. At that time, Appellants could  proceed with the Federal Court Action and  adjudicate their bad faith claim.

19
. . . .

20
. . . The Walworth County Action is the best  forum for resolution of all claims other than the  bad faith claim and the bad faith claim should be  litigated in the Federal Court Action after  completion of the Walworth County Action.

21
Judge John W. Reynolds, to whom the bankruptcy  appeal was assigned, said:    If General wins in state court, obviously there  is no bad faith claim. If General loses, issue  preclusion will prevent General from relitigating  most issues in the bad faith claim. The trustees  would have a stronger case if claim preclusion  and a final resolution of the state case would  bar the federal action, thereby denying the  trustees the right to ever raise the bad faith  claim. Because the trustees have not raised this  issue, the court assumes it is not a problem.

22
After a 2-week trial in Walworth County, a jury  found that GenStar breached the contract and  awarded Montana and Sugar Shack $260,000 in  insurance coverage damages and $3.327 million in  consequential damages. The state trial judge, on  motions after verdict, set aside both awards. The  Wisconsin Court of Appeals affirmed in part and  reversed in part, reinstating the $260,000 coverage  award.

23
Montana and Sugar Shack then sought to reopen  and restore this case to the court's active  docket so they could pursue their bad faith  claim. By letter dated March 9, 1998, Judge Lynn  Adelman, to whom the case had now been assigned,  raised the question of claim preclusion on his  own motion and ordered briefing on the issue.  Seizing the moment, GenStar moved for summary  judgment, claiming that the case was in fact  barred. Finding no controlling Wisconsin law on  the issue before him, the judge conducted a  general, Restatement-based, analysis of claim  preclusion law as he predicted the Wisconsin  courts would do in this situation. He then  granted GenStar's motion for summary judgment and  dismissed the case. Sugar Shack and Montana appeal.

24
We disagree with the conclusion that Wisconsin law offers too little guidance on this issue.  Because existing snippets of Wisconsin law offer strong hints of how Wisconsin courts would view these facts, we cannot agree with the district  court. Furthermore, even under a purely legal analysis of the issue as one of first impression in Wisconsin (such as the district judge  conducted), the facts lead us to a conclusion  contrary to the one reached in the district  court.

25
It can hardly be disputed that everyone assumed  all along that the bad faith claim could proceed  in federal court after the trial was completed on  the other issues pending in state court. There  was no issue of judicial economy and no way to  avoid two trials. Even had the bad faith claim  been filed in Walworth County, the state court  judge stated that he would have tried that claim  separately from the rest of the case. That suited  GenStar, which quite naturally wanted bad faith  issues kept out of the first trial. More than  likely, GenStar was not very concerned all along  with the stayed federal case because it thought  it would win in Walworth County and the bad faith  case would go away. Although GenStar tried to get  rid of the bad faith suit when it incorrectly  told Judge Warren that there was nothing left of  the federal case, it did not object when he  declined to dismiss the case. Plus, on more than  one occasion, GenStar specifically acknowledged  that the federal case could proceed after the  state case was over.

26
At least two Wisconsin cases strongly suggest  that in this situation, Wisconsin courts would  not be offended by the existence of an action  based on the tort of bad faith and a separate  action regarding coverage issues. That is what  happened in Heyden v. Safeco Title Insurance  Company, 175 Wis. 2d 508, 498 N.W.2d 905 (Wis.  App. 1993), overruled on other grounds, Weiss v.  United Fire, 197 Wis. 2d 365, 541 N.W.2d 753  (1995). Prior to the 1993 decision in Heyden, the  court of appeals had issued (in 1989) an  unpublished order which concerned precisely the  issue before us. Even though the unpublished  order is not controlling precedent (see sec.  809.23(3) Wisconsin Statutes) there is no  impediment to noting what the court of appeals  said in the published decision about its holding  in the unpublished order:

27
[O]ur November 20, 1989, order, which is the law  of this case, made it clear that I.W.S.'s "bad  faith" action against Safeco is not barred by the  earlier breach-of-contract action.

28
At 520. Further, in a footnote, the court said:

29
On November 20, 1989, this court summarily  reversed the judgment of dismissal, holding that  the breach-of-contract claim and the bad-faith  claim "each arose from a separate transaction"  for res judicata purposes.

30
N.2, at 515. What we learn from Heyden, then, is  that in at least one instance a bad faith claim  was not barred by a prior breach of contract  action. When we are predicting the course of  Wisconsin law, clues like these indicate to us  that Wisconsin courts might very well be willing  to allow Montana's bad faith claim to proceed.

31
The second case is Davis v. American Family  Mutual Insurance Company, 212 Wis. 2d 382, 569 N.W.2d 64 (Wis. App. 1997), in which the insured  was injured in a one-vehicle accident in Hennepin  County, Minnesota, in a vehicle driven by an  underinsured motorist. Davis settled with the  driver (for less than the inadequate policy  limits) and then claimed underinsured motorist  benefits from his insurance company, American  Family. American Family denied the claim and  Davis sued in Minnesota, which allows an insured  to sue for underinsured motorist benefits after  the acceptance of a settlement for less than the  policy limits of the underinsured motorist. Davis  won. He then filed a bad faith action against  American Family in Wisconsin. American Family moved to transfer the case to Minnesota; the  Wisconsin judge granted the motion and said that  to the extent claim is unavailable in Minnesota,  he presumably would allow the parties to proceed.  The Hennepin County court dismissed the case  because Minnesota does not recognize a tort of  bad faith. Back in Wisconsin, American Family  moved for summary judgment on res judicata  principles. The court granted the motion and  Davis appealed. The court of appeals rejected the  argument. Davis, even though he seemed clearly to  be forum shopping, was allowed to proceed with  his bad faith claim. In finding that the suit was  not barred, the court relied heavily on what the  trial judge said he would do:

32
Davis argues that claim preclusion is  inapplicable to this case. We agree. As a matter  of law, claim preclusion does not apply when the  plaintiff accepts the trial court's invitation to  file his claim elsewhere. Schneider v. Mistele,  39 Wis. 2d 137, 158 N.W.2d 383 (1968). "[A] prior  judgment is not res adjudicata or an estoppel bar  as to any matter which the court in the earlier  case expressly refused to submit to the jury and  expressly directed should be litigated in another  forum, or in another action." Id. at 141, 158  N.W.2d at 385 (footnote omitted). Here, the trial  court granted a stay so that Davis' bad faith  claim could be tried in Minnesota, and ordered  that "[t]o the extent that the claim and  prosecution are unavailable in Minnesota, this  court would retain jurisdiction and allow the  parties to pursue action in this Court for  ultimate determination." We conclude that the  trial court's order granting the stay but  permitting Davis to return with his bad faith  claim to Wisconsin prevents the application of  claim preclusion to bar Davis' bad faith claim.

33
The situation bears a strong similarity to what  happened in the present case.

34
We think Wisconsin courts would look to the  procedural history of Montana's case, to what the  judges and the parties said and assumed, and  determine that, at least under these peculiar  facts, the bad faith case is not barred.

35
Our conclusion is consistent with the long-standing view of the Wisconsin courts that a  breach of contract claim and a bad faith claim  are separate claims. See Anderson v. Continental  Ins. Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978).  In fact, in Warmka v. Hartland Cicero Mutual  Insurance Company, 136 Wis. 2d 31, 400 N.W.2d 923  (1987), the court said that the bad faith claim  is not based on the policy (as is the breach of  contract claim, of course) but grows out of a  breach of a duty to properly investigate a claim.  While these cases are not dispositive on the  claim preclusion issue, taken together with  Heyden and Davis they further bolster our belief  that Wisconsin courts--at least in the odd  circumstances of this case--would allow the bad  faith claim to proceed.

36
We hesitate to say more because the procedural  facts before us make this a poor case in which to  proclaim general principles of law. Particularly,  it is not a good case for the federal courts to  make unnecessary predictions about the future of  Wisconsin law. That said, we will comment only  briefly on the effect of the Restatement (Second)  on Judgments (1982).

37
In the absence of what it perceived to be a  clear statement of Wisconsin law, the district  court turned to the Restatement (Second) of  Judgments (1982) to analyze whether the bad faith  claim should be allowed to proceed. Determining  that Wisconsin follows a transaction approach,  the district court proceeded to look to the  Wisconsin rule on counterclaims. Although it  recognized that the Wisconsin rule generally  provides for permissive counterclaims,2 the  court concluded that the permissive counterclaim  rule did not answer the question whether a  defendant may split its counterclaims, as Montana  did here by bringing some in Walworth County and  maintaining the bad faith claim in federal court.  It is at this point that the analysis was guided  by the Restatement, which says in the comment to  sec. 21 that a defendant who interposes a  counterclaim is in effect a plaintiff to whom the  rules of merger apply--which means that a party  who obtains a judgment cannot bring a separate  action on any part of the original claim because  the original claim is merged into the judgment.  sec. 18(1). The district court then concluded  that a defendant who obtains a judgment on a  counterclaim is foreclosed from recovering on  other counterclaims arising out of the same  transaction.

38
At best, we think the district court's analysis  stops one step short of the finish line. The  Restatement also sets out exceptions to the general  rule against splitting counterclaims in sec. 26.  The Comment to that section notes that splitting is  not prohibited when the opposing party consents to  or acquiesces in the splitting. We will quote at length:

39
(a)  Consent to or acquiescence in splitting  (Subsection (1)(a)). A main purpose of the  general rule stated in sec. 24 is to protect the  defendant from being harassed by repetitive  actions based on the same claim. The rule is thus  not applicable where the defendant consents, in  express words or otherwise, to the splitting of  the claim.

40
The parties to a pending action may agree that  some part of the claim shall be withdrawn from  the action with the understanding that the  plaintiff shall not be precluded from  subsequently maintaining an action based upon it.  The agreement will normally be given effect. Or  there may be an effective agreement, before an  action is commenced, to litigate a part of a  claim in that action but to reserve the rest of  the claim for another action. So also the parties  may enter into an agreement, not directed to a  particular contemplated action, which may have  the effect of preserving a claim that might  otherwise be superseded by a judgment, for  example, a clause included routinely in  separation agreements between husband and wife  providing that the terms of the separation  agreement shall not be invalidated or otherwise  affected by a judgment of divorce and that those  terms shall survive such a judgment.

41
Where the plaintiff is simultaneously maintaining separate actions based upon parts of  the same claim, and in neither action does the  defendant make the objection that another action  is pending based on the same claim, judgment in  one of the actions does not preclude the  plaintiff from proceeding and obtaining judgment  in the other action. The failure of the defendant  to object to the splitting of the plaintiff's  claim is effective as an acquiescence in the  splitting of the claim.

42
The record shows that GenStar clearly acquiesced  in--and in fact encouraged--the splitting of  Montana's claim. Even under an analysis based on  the Restatement, Montana must be allowed to  proceed with her bad faith claim.

The judgment of the district court is

43
REVERSED and REMANDED.

Notes:

1
 A device which permits a district court to remove  a case like this from its active docket and thus  relieve the court from reporting on its status at  periodic intervals.

2
 For an exception, see A.B.C.G. Enterprises, Inc.  v. First Bank Southeast, 184 Wis. 2d 465, 515 N.W.2d 904 (1994).