Court Opinion

ID: 2996015
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:24:20.577805+00
Date Added: 2024-06-11T13:35:12.702229
License: Public Domain

In the
United States Court of Appeals
              For the Seventh Circuit
                         ____________

No. 02-3159
JINWOONG, INC.,
                                                 Plaintiff-Appellee,
                                v.

JINWOONG, INC.,
                                             Defendant-Appellant.
                         ____________
            Appeal from the United States District Court
                for the Southern District of Illinois.
             No. 98 C 4194—David R. Herndon, Judge.
                         ____________
   ARGUED SEPTEMBER 11, 2002—DECIDED OCTOBER 17, 2002
                         ____________

  Before POSNER, EASTERBROOK, and EVANS, Circuit Judges.
  POSNER, Circuit Judge. This appeal from a diversity dam-
ages suit between identically named parties (and no, it
is not a suit for divorce) started off on a very bad foot,
with the appellant certifying in its statement of jurisdic-
tion that it was appealing from a final judgment and the
appellee certifying in its statement of jurisdiction that the
appellant’s statement was complete and correct. In fact
the judgment order stated merely that summary judgment
was being granted for the plaintiff, without specifying the
amount of damages that was being ordered. Such a judg-
ment is nonfinal and therefore (with immaterial excep-
2                                                No. 02-3159

tions) unappealable. Liberty Mutual Ins. Co. v. Wetzel, 424
U.S. 737 (1976); Mercer v. Magnant, 40 F.3d 893, 896 (7th Cir.
1994). So we dismissed the appeal. The judge then entered
a proper judgment awarding $1.2 million to the plaintiff,
and the defendant filed a new notice of appeal.
   Worse was to come. The parties as we said have the
same name, but the plaintiff is a California corporation
and the defendant a Korean corporation. (From here on
in we’ll call them “J-USA” and “J-Korea.”) The briefs
suggest that the only relation that has ever existed be-
tween them was that J-USA was the U.S. distributor of
J-Korea’s products. But we discovered at argument that
when the suit was filed, J-USA was a subsidiary of J-Korea,
though it was later sold. A suit by a subsidiary against
its parent is sufficiently outré to warrant mention by the
parties. We shall set the former relation between the par-
ties to one side for a moment but come back to it.
  The appeal arises from the following sequence of events,
which we state in simplified form. J-Korea sold a tent, to-
gether with the stakes for fastening it to the ground, to
American Recreation Products (ARP). It is unclear where J-
Korea got the tent that it sold ARP, but the stakes were
manufactured by an independent contractor in Korea that
J-Korea hired for this task, according to specifications that
ARP furnished it. J-Korea shipped the tent and stakes
to J-USA, which packaged them and delivered them ei-
ther to ARP or to ARP’s customer, Wal-Mart. One of the
stakes had been defectively manufactured, and it broke
and caused a serious injury to a child named Amanda
Cochran. That was in 1994. Shortly afterwards, she (by her
parents) sued ARP, Wal-Mart, and a third firm (Kellwood),
the role of which in this whole business is obscure and
which therefore we shall ignore, in an Illinois state court.
No. 02-3159                                                3

The suit sought damages on grounds of breach of war-
ranty, strict products liability, and negligence.
  Two years into the suit (1996) Wal-Mart filed a third-
party claim against J-USA. The Cochrans then amended
their complaint to add as a defendant Jinwoong, Inc.,
described in the amended complaint as a domestic corpora-
tion that was however “the same entity” as J-Korea. This
domestic corporation was in fact J-USA. J-Korea soon
learned that J-USA was being sued both by Wal-Mart and
by the Cochrans. But it made no effort to intervene. J-USA
says that it tried to implead J-Korea but was rebuffed by the
court; the record is muddy on this issue. Although
J-Korea did not receive formal notice of the claims against
J-USA until much later, it is apparent from an e-mail in
the record and other evidence that J-Korea, though not
impleaded or otherwise formally notified, learned about
the claim against J-USA soon after it was filed.
  In 1998 the Cochrans’ suit was settled after they obtained
summary judgment against J-USA on liability. J-USA
agreed to pay them $1.2 million and then brought this
diversity suit against J-Korea, seeking indemnity for the
amount of the settlement. It is from the belatedly entered
judgment for that amount that J-Korea is appealing.
   Indemnity is another name for insurance, and it is
common for the parties to a contract to provide that in
the event that one is held liable the other shall indemnify
it for the consequences. For example, contracts between
authors and publishers invariably require the author to
indemnify the publisher should the latter be held liable
for defamation contained in the author’s book. The underly-
ing principle is that the party that is in the better posi-
tion to avoid liability is given an incentive to do so by
being made responsible for the consequences. McMunn v.
4                                                 No. 02-3159

Hertz Equipment Rental Corp., 91 F.2d 88, 91 (7th Cir. 1986);
cf. Marvin A. Chirelstein, Concepts and Case Analysis in
the Law of Contracts 10 (3d ed. 1998). But even if the parties
fail to include an indemnity provision in their contract,
if it is apparent that they would have done so had the
point occurred to them the courts will read it into their
contract unless it is disclaimed. Contract completion is a
standard function of common law courts. Harold Wright
Co. v. E.I. DuPont De Nemours & Co., 49 F.3d 308, 310
(7th Cir. 1995); Wisconsin Real Estate Investment Trust v.
Weinstein, 781 F.2d 589, 593 (7th Cir. 1986); Lisa Bernstein,
“Social Norms and Default Rules Analysis,” 3 S. Cal.
Interdisciplinary L.J. 59, 62 (1993). It reduces transaction
costs and gives the parties an approximation to what, if
they were omniscient, they would have provided respect-
ing every possible contingency that might arise in the
course of performance of the contract.
   For indemnity to be thus “implied” in a contract, the
Illinois cases require (and it is Illinois common law that
all agree governs the substantive issues in this diversity
suit) that the parties must have already had a relation-
ship when the tort giving rise to the liability occurred—
for remember that the function of the doctrine of implied
indemnity is to fill out the parties’ contract; it is not to
create a contract where none existed. In addition, the par-
ty on whom the duty to indemnify is sought to be im-
posed must have been in some (though often an attenu-
ated) sense “at fault” and the other party blameless
though liable—that is to say, only strictly liable, by virtue of
respondeat superior, implied warranty, strict products
liability, or some other legal principle that imposes liabil-
ity regardless of fault. E.g., Frazer v. A.F. Munsterman, Inc.,
527 N.E.2d 1248, 1251-52 (Ill. 1988); Kerschner v. Weiss & Co.,
667 N.E.2d 1351, 1355-56 (Ill. App. 1996). Obviously the fact
No. 02-3159                                                 5

that the party seeking indemnity was sued and settled
rather than litigating to the death does not establish blame
and thus refute his right to indemnity. Richardson v.
Chapman, 676 N.E.2d 621, 631 (Ill. 1997); Faier v. Ambrose &
Cushing, P.C., 609 N.E.2d 315, 316 (Ill. 1993).
  It is by virtue of the requirement of a preexisting relation
that the parties’ failure to disclose their corporate affilia-
tion (which did not dissolve till after this suit was brought)
so startles. Obviously they had a preexisting relation: one
was owned by the other! Yet J-Korea denied in its brief
that there was any preexisting relation, and J-USA said
only that the two companies had a supplier-distributor
relation, J-USA’s role being to import the goods from Korea
and market them in the United States. J-Korea may have
denied the relationship in an effort to deny one element
of the Illinois test for indemnity, while J-USA may have
ignored the relationship lest its existence make us think
that they were indeed “the same entity” so that the fault
of J-Korea should be attributed to J-USA. Another possi-
bility, however, is, as we shall see, that the preexisting
relation was not the right kind from the standpoint of
indemnity doctrine. Still, the lawyers should have been
more forthcoming.
   A further question about the corporate relation is
whether it renders the suit collusive. We think not. J-USA
was a subsidiary but (we were told at argument without
contradiction) not a wholly owned one, so its board
of directors had obligations to minority shareholders,
especially in a case that involved a conflict with the parent;
it may also have had obligations to creditors who by virtue
of the principle of limited liability could not look to the
parent to pay J-USA’s debts. One obligation of J-USA to its
minority shareholders was to enforce any right of indemnity
that the law gave it, or rather not to refuse to enforce it
6                                                  No. 02-3159

merely because the right was against its parent. Cf. Sinclair
Oil Corp. v. Levien, 280 A.2d 717, 720, 723 (Del. 1971); Case v.
New York Central R.R., 204 N.E.2d 643, 645-46, 656 (N.Y.
1965); Palley v. McDonnell Co., 295 A.2d 762, 765 (Del. Ch.
1972). The obligation was honored. J-USA having dutifully
bought insurance that funded the settlement with the
Cochrans, the insurance company became the subrogee of
J-USA’s indemnity claim and is, we understand, controlling
this suit. J-Korea is insured by another insurance company,
which is controlling the defense.
   So the suit is not collusive and let us move to the mer-
its. As we said, because implied indemnity is meant to fill a
gap in the parties’ contract there has to be a preexist-
ing relation in the nature of contract and there was here:
J-USA was J-Korea’s U.S. distributor. The corporate rela-
tion itself was not the preexisting relation that the cases
require; if the corporations though affiliated were not
dealing with each other, imposition of implied indemnity
would be an end run around limited corporate liability,
which with immaterial exceptions applies even between
affiliated corporations. That is, if A sues B, a subsidiary
of C, B would not by virtue of the parent-subsidiary
relation have a right to indemnity from C. The law does
not attribute responsibility for the torts of a subsidiary to its
parent, let alone regard the parent as the real wrong-
doer and the subsidiary as liable merely under some the-
ory of strict liability. Such a theory of indemnity would
be upside down, since C, the parent, would have been
an entirely passive participant in the events giving rise
to A’s suit against B.
  There is a more difficult question concerning the relative
blame of our like-named parties. When two parties are both
at fault, even if not equally, the doctrine that per-
No. 02-3159                                                 7

mits a readjustment of liability in accordance with relative
fault is contribution rather than indemnity. Indemnity is
for “when the cheapest way of avoiding a careless acci-
dent is for one party to take all the precautions.” Hillier v.
Southern Towing Co., 714 F.2d 714, 720 (7th Cir. 1983)
(emphasis added). J-Korea fastens on the fact that the
Cochrans’ amended complaint charged J-USA with negli-
gence. But it is apparent from the wording of that plead-
ing and the further proceedings in the state court that the
Cochrans had only an imperfect idea of the relation among
the different Jinwoongs—hence the “same entity” claim.
In fact, no evidence ever emerged that J-USA did any-
thing except package and deliver the tent and its stakes,
or that the defect was introduced in, exacerbated by, or
should have been discovered and corrected in the course
of the packaging and delivery function performed by
J-USA.
  A trickier question is whether J-Korea itself was at fault,
since it did not manufacture the defective stake or pro-
vide the specs for it, but instead transmitted ARP’s specs
to an independent contractor whom J-Korea hired to manu-
facture it. There is evidence, however, that J-Korea culpa-
bly failed to detect its subcontractor’s failure to manufac-
ture the stake according to the specifications furnished
J-Korea by ARP and forwarded by J-Korea to the subcon-
tractor. The failure was culpable because J-Korea moni-
tored and inspected the manufacture of the stakes and
also inspected and tested the stakes, and there is no sug-
gestion that a careful inspection at either stage would
have failed to discover the defect. The failure was there-
fore negligence and a distributor whose only liability is
strict liability is entitled to indemnity from a negligent
supplier. Cooper Power Systems, Inc. v. Union Carbide
Chemicals & Plastics Co., Inc., 123 F.3d 675, 684 (7th Cir.
8                                                 No. 02-3159

1997); cf. Frazer v. A.F. Munsterman, Inc., supra, 527 N.E.2d
1248, 1251-52; Kerschner v. Weiss & Co., supra, 667 N.E.2d
at 1355-56.
  It is true that J-Korea’s negligence was not at issue in the
Cochrans’ suit. That case was settled, apparently on the
basis of J-USA’s strict liability. J-Korea was not a defendant
and its negligence was irrelevant. This point has been
obscured by J-Korea’s charge that J-USA took a dive in
the Cochrans’ suit knowing (or hoping) that it could lay off
the expense of settlement on J-Korea, and that J-USA
should have impleaded J-Korea or at least formally
notified it of the Cochrans’ suit and given it a chance to
defend its interest. It is here that the analogy between
contractual indemnity and formal insurance is closest.
Ordinarily an insurance company insists on controlling
the suit against its insured to protect its stake, and to
that end insists on prompt notification of the suit. All
that is set out in the insurance contract. But when as in
this case indemnity is not sought on the basis of an in-
surance contract or some other contract of indemnity, no
formalities are prescribed (for there is no contract to pre-
scribe formalities and no statute to do so either, as we
are dealing with a common law doctrine) or are required.
The only question is whether the party seeking indemnity
gave the other party (or at least the other party had) a fair
opportunity to protect its interests. Due process requires
no less, but no more either. See Atlantic Richfield Co. v.
Interstate Oil Transport, 784 F.2d 106, 111, 113 (2d Cir. 1986);
Burke v. Ripp, 619 F.2d 354, 357-59 (5th Cir. 1980); Jennings
v. United States, 374 F.2d 983, 985-86 (4th Cir. 1967).
  The requirements of due process were satisfied here, if
barely. J-Korea learned of Wal-Mart’s and the Cochrans’
claims against J-USA shortly after they were made, and
under Illinois law it could have intervened in the suit at
No. 02-3159                                                 9

that time. See 735 ILCS 512-408(a); Freesen, Inc. v. County of
McLean, 659 N.E.2d 411, 414 (Ill. App. 1995); Moore v.
McDaniel, 362 N.E.2d 382, 388-89 (Ill. App. 1977); City of
Chicago v. Zik, 211 N.E.2d 545, 546 (Ill. App. 1965). That
would not have been too late to protect itself from the
consequences of what it claims to have been J-USA’s
repeated dropping of the ball in the defense of the claims.
Therefore the failure of formal notice whether by im-
pleader or otherwise is not a defense to J-USA’s claim for
indemnity.
   Although J-Korea thus cannot complain about J-USA’s
having settled the case, there is still the question whether
J-Korea was negligent or otherwise blameworthy relative
to the blameless J-USA. J-Korea’s failure to intervene in
the state suit cannot be thought to have resolved, or
excused the district court in J-USA’s indemnity suit (this
suit) from having to resolve, that issue. For had J-Korea
intervened in the Cochrans’ suit, it is doubtful, to say the
least, that the court would have determined whether
J-Korea had been negligent—its negligence would have
been irrelevant to J-USA’s or any of the other defendants’
liability to the Cochrans—unless J-USA had filed a third-
party complaint against J-Korea. Doubtless J-USA would
have done so had J-Korea been a party; that is why J-USA
tried to implead it, to make it a party. But for reasons that
are obscure, the attempt failed and as a result J-Korea’s
culpability was not determined—in that suit. But in this
suit, J-USA presented evidence—the evidence we sum-
marized earlier—that J-Korea had indeed been negligent
in failing to detect the defect in the tent stake. J-Korea
presented no counter evidence.
  The district court did not, however, make an explicit
finding that J-Korea had been negligent. All it found was “a
qualitative distinction” between J-Korea’s conduct and
10                                                No. 02-3159

that of J-USA that favored the latter. “Qualitative dis-
tinction” is not a very satisfactory standard, because it
is so vague. But what the term, like the “active-passive”
formula also found in indemnity cases, is gesturing to-
ward is the fact that, although as we said earlier indem-
nity is allowed only when the party against whom indem-
nity is sought is “at fault,” the requisite “fault” may consist
of nothing worse than having been responsible in a merely
causal sense for a product defect. Negligence is not re-
quired. A retailer or other distributor of a product who
had absolutely nothing to do with its manufacture, and
is held strictly liable to a customer injured by a defect
in the product solely by virtue of doctrines of implied
warranty or strict products liability, can still obtain indem-
nity from the manufacturer, on the theory that the latter,
even if not negligent, made the defective product and so in a
sense caused the defect. Texaco, Inc. v. McGrew Lumber
Co., 254 N.E.2d 584, 588 (Ill. App. 1969); Schneider National,
Inc. v. Holland Hitch Co., 843 P.2d 561, 581 (Wyo. 1992). The
manufacturer is better able than the distributor to pre-
vent the defect, maybe just by curtailing output if great-
er care in manufacture would not be cost justified. More
important (because it usually is uneconomical to achieve
zero-defect output), the manufacturer is in a better posi-
tion to estimate the likelihood and cost of accidents due
to defects in his product and to insure against such mis-
haps. This point is illustrated by the “vendor’s endorse-
ment,” a common provision in a manufacturer’s liability
insurance policy that extends coverage to his distributors.
Hartford Fire Ins. Co. v. St. Paul Surplus Lines Ins. Co., 280
F.3d 744, 745-46 (7th Cir. 2002).
  A further wrinkle here, however, is that J-Korea did not
manufacture the defective stake. Supposing it hired an
entirely reputable firm to manufacture it, why should it
No. 02-3159                                                 11

be thought in a better position to have avoided the acci-
dent than J-USA or even to have estimated the likelihood
of an accident and insured against it better than J-USA
could have done? But we need not try to answer this
question. J-Korea devotes only a sentence to denying that
it was negligent or otherwise blameworthy relative to
J-USA, and that is not enough discussion to preserve the
issue for appellate review. Jones Motor Co. v. Holtkamp,
Liese, Beckemeier & Childress, P.C., 197 F.3d 1190, 1192 (7th
Cir. 1999); United States v. Berkowitz, 927 F.2d 1376, 1383-84
(7th Cir. 1991); Karibian v. Columbia University, 14 F.3d 773,
777 n. 1 (2d Cir. 1994).
                                                   AFFIRMED.

A true Copy:
        Teste:

                           _____________________________
                            Clerk of the United States Court of
                              Appeals for the Seventh Circuit

                    USCA-02-C-0072—10-17-02