Opinion
Case No. 91-C-0163.
July 26, 2000.
Christopher T. Hale, George Glonek for Plaintiffs.
John B. McCabe, Wm. E. Duffin for Defendant.
DECISION AND ORDER
I. BACKGROUND
Lake Geneva Sugar Shack, Inc. ("Sugar Shack") was 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. Sugar Shack purchased an insurance policy from General Star Indemnity Co. ("Genstar") in July 1989. In February 1990 a fire substantially damaged the nightclub. Genstar denied coverage because it concluded that Montana was involved in starting the fire.
Genstar brought a declaratory judgment action against Sugar Shack and Montana in state court seeking to dissolve the insurance agreement. Sugar Shack and Montana then filed the present action in federal court alleging that Genstar acted in bad faith by refusing to pay the insurance claim. The present case was stayed pending resolution of the state court action.
Sugar Shack and Montana filed a counterclaim for breach of contract in the state court case. After trial the jury found that Genstar breached the insurance contract and awarded Sugar Shack and Montana over $3,500,000 in compensatory and consequential damages. Subsequently, the trial and appellate courts reduced the award to $260,000.
After completion of the state court case the present case was reactivated. Genstar now moves to dismiss Montana's bad faith claim on the ground that she was not a party to the contract between Genstar and Sugar Shack. The parties have briefed and argued the issue.
In the interim both Sugar Shack and Montana declared bankruptcy and the trustees of their bankruptcy estates were substituted for them as plaintiffs. For ease of reference, however, I will continue to refer to the plaintiffs as Sugar Shack and Montana.
II. APPLICABLE STANDARD AND LAW
Genstar moves to dismiss under Fed.R.Civ.P. 12(b)(6) and attaches various documents to its motion. Montana attaches documents to her response. Under rule 12(b)(6), if matters outside the pleading are presented and not excluded by the court, the motion is treated as one for summary judgment and the parties are given the opportunity to present any material pertinent to such motion. I will consider both parties' attachments and treat the motion as one for summary judgment. The parties have submitted all pertinent material.
A. Summary Judgment Standard
As is well known, summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The moving party has the initial burden of demonstrating that it is entitled to summary judgment. Id. at 323. Once this burden is met, the nonmoving party must designate specific facts to support or defend each element of the cause of action, showing that there is a genuine issue for trial. Id. at 322-24.
In analyzing whether a question of fact exists, the court construes the evidence in the light most favorable to the party opposing the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). The mere existence of some factual dispute does not defeat a summary judgment motion, however; "the requirement is that there be no genuine issue of material fact." Id. at 247-48.
"Material" means that the factual dispute must be outcome-determinative under governing law. Contreras v. City of Chicago, 119 F.3d 1286, 1291 (7th Cir. 1997). Failure to support any essential element of a claim renders all other facts immaterial. Celotex, 477 U.S. at 323. Therefore, summary judgment is appropriate against a party who, after adequate time for discovery and in the face of a properly supported summary judgment motion, fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. Id. at 322.
Whether a material issue of fact is "genuine" necessarily requires some qualitative determination of sufficiency of the evidence. To defeat a properly supported motion for summary judgment, the opposing party must present specific and sufficient evidence that, if believed by a jury, would actually support a verdict in its favor. Fed.R.Civ.P. 56(e); Anderson, 477 U.S. at 249. A "metaphysical doubt as to the material facts" is insufficient to defeat a motion for summary judgment. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986);Regensburger v. China Adoption Consultants, Ltd., 138 F.3d 1201, 1205 (7th Cir. 1998). Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial. Matsushtia, 475 U.S. at 587. "A district judge faced with [a summary judgment] motion must decide . . . whether the state of the evidence is such that, if the case were tried tomorrow, the plaintiff would have a fair chance of obtaining a verdict. If not, the motion should be granted and the case dismissed." Palucki v. Sears, Roebuck Co., 879 F.2d 1568, 1572-73 (7th Cir. 1989) (citations omitted).
B. Applicable Substantive Law
In a diversity case a federal court generally applies the substantive law of the state in which it sits. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Doe v. Roe No. 1, 52 F.3d 151, 154 (7th Cir. 1995). The parties here agree that Wisconsin law applies to plaintiff's claims.
III. DISCUSSION
Genstar argues that Montana's bad faith claim must be dismissed because Montana was not insured under Genstar's policy. Montana responds in two ways: (1) that Genstar is estopped from making this argument based on its statements in the state court action; and (2) that Montana had an insurable interest in Sugar Shack's property and that such interest is sufficient to enable her to maintain a bad faith action against Genstar. I address each argument in turn.
A. Estoppel
Montana asserts that because Genstar took a contrary position in state court it is estopped from arguing that Montana cannot bring a bad faith claim because she is not an insured. Montana points to statements made by Genstar in state court including: (1) allegations in its complaint that the insurance policy "provides no coverage to Sugar Shack or Montana," that "Sugar Shack and Dana Montana are in breach of their policy conditions," and that "no coverage is afforded to Sugar Shack or Dana Montana under the subject policy," (Hale Aff. Ex. A at 3, 5, 6); (2) an admission that "with respect to the . . . issues involved in this lawsuit, all actions and omissions of Dana Montana are imputed to the Lake Geneva Sugar Shack," (Hale Aff. Ex. B at 1); (3) a stipulated statement introducing the state court case to the jury saying that "for purposes of this case Ms. Montana is the Sugar Shack," (Hale Aff. Ex. C, Ex. C at 1 ); and (4) a portion of the state court of appeals' opinion relating the parties' stipulation that Montana was the Sugar Shack and stating that although Genstar "would now like to be relieved of the characterization that the two defendants were the same for all practical purposes, they are estopped from doing so," (Hale Aff. Ex. E at 3-4)
The statement in fuller context reads as follows: "The Sugar Shack is a corporation called the Lake Geneva Sugar Shack, Inc. The sole officer, director and shareholder of the corporation is Ms. Dana Montana. Although the Sugar Shack is a corporation, for purposes of this case, Ms. Montana is the Sugar Shack." (Hale Aff. Ex. C., Ex. C at 1.)
In fuller context, the court wrote: "The parties stipulated that Montana was the Sugar Shack. The respondents contend that the stipulation was only for the purpose of making it easier for the jury to understand the case by ignoring the corporate veil. Although they respondents would now like to be relieved of the characterization that the two defendants were the same for all practical purposes, they are estopped from doing so." (Hale Aff. Ex. E at 3-4.) The court's decision allowed correction of a defective notice of appeal naming the Bankruptcy Estate of Montana as sole appellant to include the Bankruptcy Estate of Sugar Shack as well because of the unity between the two parties. (See Hale Aff. Ex. E.)
Montana does not distinguish between the various doctrines of estoppel. She argues estoppel by record but also cites a case relating to judicial estoppel. I will discuss the possible application of various theories of estoppel.
1. Estoppel by Record
Under the theory of claim preclusion a final judgment is conclusive in all subsequent actions between the same parties as to all matters that were litigated or might have been litigated in the former proceeding. DePratt v. West Bend Mut. Ins. Co., 113 Wis.2d 306, 310 (1983). Estoppel by record is identical to claim preclusion except that it is the record of the earlier proceeding, rather than the judgment itself, that bars the subsequent proceeding. Lindas v. Cady, 183 Wis.2d 547, 558 (1994). In order for estoppel by record to apply there must be an identity of parties or their privies and an identity of claims in the two cases. Id. Here the parties in the state case were the same as those in the case before me. However, the claims in the two cases are not identical. In the state case Montana's counterclaim against Genstar was for breach of contract. In the present case Montana's claim is for bad faith. These claims are distinct. Anderson v. Continental Ins. Co., 85 Wis.2d 675 (1978). Therefore, the doctrine of estoppel by record does not bar Genstar from arguing that Montana's bad faith claim must be dismissed because she was not a named insured.
2. Judicial Estoppel
Without referring to the doctrine of judicial estoppel Montana cites Godfrey Co. v. Lopard, 164 Wis.2d 352 (Ct.App. 1991), a judicial estoppel case. Judicial estoppel is a doctrine intended to prevent perversion of the judicial process. In re Cassidy, 892 F.2d 637, 641 (7th Cir. 1990); State v. Petty, 201 Wis.2d 337, 350 (1996). The doctrine is intended to protect the courts rather than the litigants. Cassidy, 892 F.2d at 641. It is to be applied where a party takes a position in a lawsuit and prevails and then intentionally takes the opposite position in an effort to obtain unfair advantage in a judicial proceeding. "The offense is not taking inconsistent positions so much as it is winning, twice, on the basis of incompatible positions." Astor Chauffeured Limousine Co. v. Runnfeldt Inc. Corp., 910 F.2d 1540. 1548 (7th Cir. 1990). The doctrine is designed to prevent cold manipulation, not innocent inconsistency or apparent inconsistencies that are actually reconcilable. Cassidy, 892 F.2d at 642. Estoppel is an equitable concept and its application is within the sound discretion of the court. Id.
It is not entirely clear whether judicial estoppel is a procedural doctrine to be governed by federal law or a substantive concept governed by state law. Compare Astor Chauffeured Limousine Co. v. Runnfeldt Inc. Corp., 910 F.2d 1540, 1550 (7th Cir. 1990) (court accepted parties' assumption that federal law applies), with Diginet, Inc. v. Western Union ATS, Inc., 958 F.2d 1388, 1397 (7th Cir. 1992) (applying state law). In this case it makes no difference because state and federal law on judicial estoppel is the same.
For several reasons Genstar is not barred by judicial estoppel from arguing that Montana cannot assert a bad faith claim. First, Genstar's position in the present lawsuit is not necessarily inconsistent with the position it took in state court. Genstar's state court complaint seeking a declaration that it owed no coverage to Montana cannot translate into an admission that Montana herself is an insured — Genstar can be considered to have been covering all bases in its complaint rather than conceding Montana's status. And as for Genstar's equating Montana with Sugar Shack, that concession related to whether Montana acted as Sugar Shack's agent regarding the circumstances of and following the fire, not necessarily to whether the two were identical regarding the creation of the policy. Second, even if positions are arguably inconsistent, such inconsistency, if any, does not rise to the level of manipulation of the courts. Nowhere in its state court complaint does Genstar allege that Montana was an insured under the policy. On the contrary, Genstar alleged that the policy provided no coverage for Sugar Shack and Montana. And third, Genstar's admission that Montana's acts or omissions may be imputed to Sugar Shack was expressly limited to "issues involved in this [meaning the state court] lawsuit." (Hale Aff. Ex. B at 1.) Similarly, the statements in the stipulation that "Ms. Montana is the Sugar Shack" and that "Ms. Montana was insured" by Genstar are both prefaced by the qualifying phrase "for the purposes of this case." (Hale Aff. Ex. C, Statement of the Case at 1.) The latter phrase is unambiguous and clearly specifies that the effect of the stipulation was limited to the state court case. It would be inequitable to bar a party from making an argument based on a stipulation in another case that the party limited to the prior case. Thus, Genstar has not forfeited the right to argue that Montana is not an insured.
3. Issue Preclusion
As previously stated, Montana makes a general argument that Genstar is estopped from taking its present position. Montana specifically refers to estoppel by record and cites a case relating to judicial estoppel. She does not mention or cite cases involving issue preclusion (also known as collateral estoppel). The failure of a party to properly present an argument in the district court constitutes a waiver of the argument. H.K. Mallak, Inc. v. Fairfield FMC Corp., 209 F.3d 960, 963 (7th Cir. 2000);see also Hightshue v. AIG Life Ins. Co., 135 F.3d 1144, 1149 (7th Cir. 1998). Thus, Montana has waived the argument of issue preclusion.
Moreover, the doctrine precludes relitigation of issues actually litigated and determined in a prior suit. Lawlor v. National Screen Serv. Corp., 349 U.S. 322, 326 (1955). A court employs a fundamental fairness analysis to determine whether issue preclusion applies. Northern States Power Co. v. Bugher, 189 Wis.2d 541, 551 (1995); see also Michelle T. by Sumpter v. Crozier, 173 Wis.2d 681 (1993) (employing five factor fundamental fairness test). Generally, an issue is not considered to have been litigated if it is the subject of a stipulation between the parties. Restatement (Second) of Judgments § 27 cmt. e (1981). Here, Genstar stipulated, for purposes of the state court case only, that Montana could be regarded as equivalent to Sugar Shack. The issue Genstar now raises, whether Montana was an insured under the policy, was not litigated in state court. Thus, the doctrine of issue preclusion does not foreclose Genstar from now making this argument.
B. Montana's Bad Faith Claim
In the present case Montana sues Genstar for bad faith, alleging that Genstar failed to conduct a reasonable investigation of the insurance claim and had no basis for refusing to pay it. Genstar argues that Montana's claim must be dismissed because she was not an insured under the insurance contract.
In Anderson v. Continental Insurance Co., 85 Wis.2d at 690, the Wisconsin Supreme Court held that "an insured may state a claim for the tort of bad faith against its own insurer." Generally speaking an "insured" is the party who enters into the contract of insurance with the insurer. 3 Lee R. Russ Thomas F. Segalla, Couch on Insurance 3d § 40.1 (1997). The term can apply to anyone who is insured under the policy or the owner of the policy. Id. The insured may be identified in the policy by name or by description. 3 id. § 40.3. For example, an insured may be referred to as "employee," or "dependent," or "eligible debtor."Id. As the purpose of a name is to designate the person intended to be insured, any designation which fulfills that purpose is sufficient. Id.
Montana does not dispute that Sugar Shack is the only named insured in the insurance contract. Further, she does not argue that the policy designates her as an insured by a description other than name. Rather, she contends that although she is not a party to the contract, as the sole stockholder and principal officer of Sugar Shack she has an "insurable interest" in the insured property, and such interest is sufficient to allow her to sue Genstar for bad faith.
Having an insurable interest in insured property, however, is not the same as being a party to an insurance contract. The concept of an insurable interest in insured property developed to prevent people from using insurance as a form of gambling by insuring property to which they had no relation. 3 id. § 41.1. Because such insurance transactions are undesirable, Wisconsin prohibits insurers from issuing policies to persons without an insurable interest in the subject of the insurance, Wis. Stat. § 631.07(1), and prohibits persons without an insurable interest from collecting on policies, Stebane Nash Co. v. Cambellsport Mut. Ins. Co., 27 Wis.2d 112, 118 (1965). An insurable interest in property is one where a person would reasonably expect to suffer a loss from its destruction or derive a benefit from its continued existence. Id.
In fact, it is not meaningful to ask whether a person has an insurable interest in insured property if it has not first been established that the person is a party to the insurance contract.Ben-Hur Mfg. Co. v. Firemen's Ins. Co., 18 Wis.2d 259, 262 (1962) (fire insurance policy is an agreement to indemnify an insured for a loss but to constitute a loss for which indemnity can be made one must also have an insurable interest); see also 21B John Alan Appleman Jean Appleman, Insurance Law and Practice § 12657 (1980) (plaintiff must be a party to the insurance contract or substituted for the original insured before it is necessary to determine whether he has an insurable interest).
Montana, however, argues that even though she was not a party to the insurance contract she can nevertheless sue Genstar for bad faith. in support of this argument she relies heavily onHeyden v. Safeco Title Ins. Co., 175 Wis.2d 508 (Ct.App. 1993), overruled on other grounds by Weiss v. United Fire and Cas. Co., 197 Wis.2d 365 (1995).
In Heyden, the I.W.S. corporation and its sole shareholder, Heyden, entered into a real estate transaction with a third party in which I.W.S. and Heyden agreed to exchange their Racine County condominium project and land for the third-party's Milwaukee motel and restaurant. A Safeco agent extended a commitment to Heyden and I.W.S. that Safeco would issue a title insurance policy to them showing that there were no liens on the Milwaukee property. After closing, Heyden and I.W.S. discovered that there were undisclosed liens on the property totaling almost two million dollars, rendering their interest virtually worthless. Heyden and I.W.S. demanded that Safeco reimburse them for damages resulting from their reliance on Safeco's commitment. When Safeco refused, Heyden and I.W.S. sued for breach of contract and won a substantial judgment.
I have taken some of the facts from the recitation of facts in the unpublished court of appeals opinion in the breach of contract case, Heyden v. Safeco Title Ins. Co., No. 89-0902 (Wis.Ct.App. Nov. 20, 1989). The unpublished opinion is discussed in the subsequent published opinion in the bad faith case, on which Montana relies. See Heyden, 175 Wis.2d at 515 n. 2. I do not cite the unpublished opinion "as precedent or authority," see Wis. Stat. 809.23(3), but use it only to provide a more complete statement of the facts for purposes of better understanding the published opinion.
Subsequently Heyden and I.W.S. brought a separate action against Safeco for bad faith. The trial court dismissed Heyden's claim on the ground that I.W.S. rather than Heyden owned the motel and thus Heyden lacked the requisite insurable interest. The court of appeals reversed, holding that as a stockholder in I.W.S. Heyden had an insurable interest in the property because its destruction would subject him to pecuniary loss. Id. at 518.
This recitation of the facts makes clear that Heyden does not stand for the proposition that a person who is not a party to an insurance contract can bring a bad faith claim against the insurer. Unlike Montana, Heyden was a party to the insurance contract. Safeco had extended a commitment to both I.W.S. and him to issue a title insurance policy. Heyden thus illustrates the general rule that to bring a bad faith claim against an insurer, one must be a party to the insurance contract and have an insurable interest in the insured property. Montana's problem is that she is not a party to the insurance contract. If she were, as the sole shareholder in Sugar Shack, she would clearly have an insurable interest in the insured property. But because she is not an insured she cannot successfully sue Genstar for bad faith.
Although the published Heyden opinion does not set forth the facts of the case it nevertheless indicates that Heyden was a party to the contract. The court noted that Heyden had brought an earlier breach of contract claim and had "recovered on the policy." Id. at 515 n. 2. Heyden could not have recovered on the policy had he not been a party to it. The court also stated that the principle of law governing the case was that "an insured has a tort-claim against his or her insurer" for bad faith, thus indicating that Heyden was an insured. Id. at 516. Further, in the course of its damages analysis, the court stated that "an insured who proves . . . bad faith . . . may recover . . . damages," id. at 518, again suggesting that Heyden was an insured.
If the Heyden court had intended to expand the number of persons who could bring bad faith claims beyond insureds, it would have discussed the issue, for such a decision would have dramatically changed state law. The principle underlying the tort of insurance bad faith is that the contractual relationship between insurer and insured is similar to a fiduciary relationship and gives rise to a special duty of good faith.Anderson v. Continental Ins. Co., 85 Wis.2d at 688. An insurer generally owes no duty to a third party because an implied covenant of good faith and fair dealing does not exist where there is no contractual relationship between the claimant and the insurer. 14 Russ Segalla, supra, § 198.17 (1999); see also Ginger v. Coronet Ins. Co., 508 F. Supp. 718, 719 (E.D. Wis. 1981) (third party claimant not in privity with insurer barred from bringing bad faith claim against insurer under Wisconsin law).
In support of her reading of Heyden, Montana cites Estate of Plautz by Pagel v. Time Ins. Co., 189 Wis.2d 136 (Ct.App. 1994), but that case does not support her argument. In Plautz, the estate of a beneficiary of life insurance brought a bad faith action against the insurer for delay in recognizing and paying a claim. The trial court dismissed the case, stating that Wisconsin only recognized three bad faith insurance actions: (1) an insured's action against an insurer for bad faith in settling with a thirdparty claimant where the ultimate judgment exposes the insured to a judgment in excess of the policy coverage; (2) an insured's action against the insurer for failure to satisfy the insured's non-debatable claim; and (3) a third party's action against the insurer for failure to reimburse a workers compensation claim. The court of appeals reversed, holding that although "our caselaw states that bad faith arises from the contractual relationship between the insurer and insured," id. at 145, in the context of life insurance if only the insured could bring a bad faith claim no such claim could ever be brought because the insured would invariably have died. Thus, the court permitted the beneficiary of a life insurance policy to bring a bad faith claim.
Montana cites a footnote in Plautz stating that "Heyden's requirement that a non-named insured have an insurable interest in the subject of the insurance policy in order to be a proper party to a lawsuit is consistent with our real party in interest analysis." Plautz, 189 Wis.2d at 146 n. 5. Montana argues that the phrase "non-named insured" suggests that Heyden permits a non-named insured like Montana, in a non-life insurance context, to sue an insurer for bad faith. However, in Heyden, unlike here, the insurer had contracted with Heyden to issue a policy to him. The only reason Heyden was a non-named insured was that the insurer had not yet formally issued the policy. By contrast. Montana was neither a named insured nor a party to a contract promising to name her as an insured. Thus, her reliance on thePlautz footnote is misplaced. If anything, Plautz makes clear that Montana cannot bring a bad faith claim because her claim is not one of the three traditional kinds of bad faith claims authorized by Wisconsin law nor does it involve life insurance.
IV. CONCLUSION
Based on the foregoing, Montana cannot prevail on her bad faith claim against Genstar. Thus,
IT IS HEREBY ORDERED that defendant's motion for summary judgment dismissing Montana's bad faith claim is GRANTED.
Dated at Milwaukee, Wisconsin, this 26 day of July, 2000.
_____________________ LYNN ADELMAN District Judge