Opinion
No. 98C6876
Filed: August 22, 2000
Decided: August 24, 2000
MEMORANDUM OPINION AND ORDER
Before this court is defendants Franks, Gerkin McKenna ("Frank Firm") and Todd W. Syverson's ("Syverson") (collectively, the "defendants") motion to dismiss the plaintiff Grinnell Mutual Reinsurance Company's ("Grinnell" or "plaintiff') three count complaint of legal malpractice. For the following reasons, the defendants' motion is DENIED.
Background
Grinnell is an insurance company that provided a vehicle liability policy to Teloptic Cable Construction Corporation ("Teloptic") for the time period of June 24, 1994 to December 27, 1994. (Complaint ¶ 8). On July 30, 1994, an employee driver of Teloptic was involved in an auto accident with one of Teloptic's insured vehicles. (Complaint ¶ 9). The driver of the other vehicle in the accident, Shena Wilson, filed suit against Teloptic on June 3, 1996 for injuries she sustained in the accident. (Complaint ¶ 10). The suit was filed in the Circuit Court of Cook County, Illinois and was entitled Shena Wilson v. Teloptic Cable Construction Corp. Inc., Case No. 96 L 6327 ("the Wilson litigation"). (Complaint ¶ 7).
On June 11, 1996, the McHenry County Sheriff's Department attempted to serve Teloptic with the summons and complaint for the Wilson litigation. However, the Sheriff attempted to serve Teloptic at the incorrect business address. (Complaint ¶¶ 11, 12, 13). As a result, Teloptic was never served in the Wilson litigation. (Complaint ¶ 14). Even though Teloptic was never served and thus the Circuit Court of Cook County did not have personal jurisdiction over Teloptic, a default judgment was entered against Teloptic on January 13, 1997. (Complaint ¶¶ 15, 16).
The Sheriff attempted to serve Teloptic at 27702 West Route 120, McHenry, Illinois. However, Teloptic did not do business at that address and was instead located at 27764 Volo Village Road, Volo, Illinois. (Complaint ¶¶ 11, 12, 13).
Upon receiving notice of the default judgment in the Wilson litigation, Teloptic retained Syverson and the Franks Firm for representation. (Complaint ¶ 17). On March 4, 1997, the Franks Firm and Syverson filed a general appearance as attorneys of record on behalf of Teloptic with the Clerk of the Circuit Court of Cook County without first verifying that Teloptic had been duly served in the Wilson litigation. (Complaint ¶¶ 20, 21). As a result of not filing a special appearance, the Franks Firm and Syverson subjected Teloptic to personal jurisdiction of the Circuit Court of Cook County. (Complaint ¶ 22). On the same day that the Franks Firm and Syverson filed their appearance, they also filed a Motion to Vacate the Default Judgment against Teloptic. However, they did not contest personal jurisdiction in that motion, nor did they move to quash the return of service of process submitted by the McHenry County Sheriff, which was the basis for the default judgment. (Complaint ¶¶ 23, 24, 25).
On April 17, 1997, Syverson and the Franks Firm brought their Motion to Vacate the Default Judgment before Judge Philip Bronstein, who informed them they had brought the motion before the wrong judge. (Complaint ¶ 27). However, Syverson and the Franks Firm did not re-present their motion before the correct judge and thus on May 12, 1997, a judgment of $300,000 was entered against Teloptic. (Complaint ¶ 28). Syverson and the Franks Firm also failed to appear for a proveup damages hearing that occurred on the same day. (Complaint ¶ 29).
In order to rectify this situation, Syverson and the Franks Firm filed another Motion to Vacate the Default Judgment on June 16, 1997. However, that motion was not heard until December 29, 1997, when the court denied the motion. (Complaint ¶¶ 31, 32).
On May 6, 1998, Grinnell was served with a garnishment summons with respect to the judgment entered against Teloptic. (Complaint ¶¶ 35, 36). On May 27, 1998, Grinnell filed its Answer and Affirmative Defenses. (Complaint ¶ 37). On September 21, 1998, the trial court held that the $300,000 judgment could be garnished from the Grinnell policy. (Complaint ¶ 38).
In response to this situation, Grinnell has filed a three-count complaint against Syverson and the Franks Firm for their actions in representing Teloptic in the Wilson litigation. Count I alleges that Grinnell is contractually and equitably subrogated to all claims and rights that Teloptic may have against a party, including Teloptic's right to sue Syverson and the Franks Firm for malpractice. (Complaint ¶¶ 51, 52). Count II alleges that, as the insurer of Teloptic, Grinnell is a direct and/or third-party beneficiary of the attorney client relationship between Teloptic and Syverson and the Franks Firm. (Complaint ¶ 55). Count III alleges that Grinnell reasonably relied upon the promises and representations made by the Franks Firm and Syverson. (Complaint ¶¶ 71, 72, 73). In response, the defendants have filed this motion to dismiss all three counts.
Standard for Motion to Dismiss
A motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure does not test whether the plaintiff will prevail on the merits, but instead whether the plaintiff has properly stated a claim for which relief may be granted. Pickrel v. City of Springfield. Ill., 45 F.3d 1115 (7th Cir. 1995). The court must accept as true all of the plaintiffs well-pleaded factual allegations, as well as all reasonable inferences. Id. Thus, the court will dismiss a complaint under Rule 12(b)(6) only if "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations."Ledford v. Sullivan, 105 F.3d 354, 357 (7th Cir. 1997) (quoting Hishon v. King Spalding, 467 U.S. 69, 78, 104 S.Ct. 2229, 2232 (1984)). However, the court need "not strain to find inferences favorable to the plaintiffs which are not apparent on the face of the complaint." Coates v. Illinois State Bd. of Ed., 559 F.2d 445, 447 (7th Cir. 1977).
Analysis
The parties agree that Illinois law governs this case. SeeIngersoll v. Klein, 46 Ill.2d 42, 45, 262 N.E.2d 593, 595 (1970). Thus this court will apply Illinois law. See Mass. Bay Insurance Co. v. Vic Koenig Leasing. Inc., 136 F.3d 116, 1120 (7th Cir. 1998).
Count I
The defendants argue that Grinnell has no contractual or equitable subrogation rights to the claims or rights that Teloptic may have against the defendants. To argue that Grinnell has no contractual subrogation rights, the defendants refer to the insurance policy in question attached to Grinnell's second amended complaint, which states in part:
In the event of any payment under this policy, we are entitled to all the rights of recovery of the person to whom payment was made against another. That person must sign and deliver to us any legal papers relating to that recovery, do whatever else is necessary to help us exercise those rights and do nothing after loss to prejudice our rights.
When a person has been paid damages by us under this policy and also recovers from another, the amount recovered from the other shall be held by that person in trust for us and reimbursed to us to the extent of our payment.
(Complaint Ex. B, p. 6, Part V, Section 5, "Our Recovery Rights").
The defendants argue that this language shows Grinnell can only be subrogated to the person to whom payments where made, in this case, Shena Wilson, not Teloptic. (Dft's Mem. of Law, pp. 8-9). However, the defendants fail to cite other contract language stating that Grinnell has a contractual obligation to indemnify Teloptic for liability to third parties: "We will pay damages for which any insured is legally liable because of bodily injury and property damage arising out of the ownership, maintenance or use of your insured vehicle." (Complaint Ex. B, p. 1, Part I, Coverage A-Bodily Injury). As will be discussed below, this language implies that Grinnell would have subrogation rights to the claims of Teloptic connected to Teloptic's liability.
Grinnell has equitable subrogation rights to Teloptic's legal malpractice claims against the defendants. The Illinois Supreme Court has not addressed the issue of whether an insurance company has equitable subrogation rights to the legal malpractice claims of an insured. However, federal district courts have discussed the issue. While this court is not bound by the ruling of another district court, this court is persuaded by the ruling of Judge Norgle in National Union Ins. Co. v. Dowd Dowd, P.C., 2 F. Supp.2d 1013 (N.D.Ill. 1998). In National Union, the court predicted that the Illinois Supreme Court would allow an excess liability insurer to be equitably subrogated to the insured's legal malpractice claim. 2 F. Supp.2d at 1024. Relying on the Illinois Supreme Court's decisions in Dix Mutual Insurance Co. v. LaFramboise, 149 Ill.2d 314, 597 N.E.2d 624 (1992), and Dworak v. Tempel, 17 Ill.2d 181, 161 N.E.2d 263 (1959), where the Illinois Supreme Court recognized an insurer's right to be equitably subrogated to its insured's claims against a tortfeasor, the court in National Union found that since the purpose of equitable subrogation is to shift the economic burden to those responsible for the loss, insurers should be able to subrogate the claims of the insured against the malpracticing attorneys:
"[Equitable subrogation] merely allows an excess insurer, who pays for any excess liability, to enforce the duties that the attorney already owes to the insured, who might have little incentive to sue his attorney since he has excess insurance coverage. . . Evidently, if the insured had not contracted for excess insurance coverage, the attorney would have to be similarly concerned about being sued by the insured for any excess liability. . . Malpracticing attorneys should not enjoy a windfall merely because the insured contracted for excess insurance coverage. . . Further, the social costs of legal malpractice is best borne by the malpracticing attorneys."Id., 2 F. Supp.2d at 1023-24.
In the present case, Teloptic does not have the incentive to sue the defendants for legal malpractice, since Teloptic's liability is paid for by the Grinnell insurance policy. If the court did not apply equitable subrogation, Grinnell would have to shoulder the economic loss caused by the behavior of the defendant, thus eliminating the disincentive to the defendants for engaging in malpractice. Therefore, the court finds that Illinois law supports an insurer's claim of equitable subrogation against the attorneys of the insured.
Grinnell has also pled the elements of subrogation. In order to state a claim of subrogation, Gmnnell must allege: 1) the claim or debt has been paid in full; 2) the claim or debt paid is one for which a third party is liable; 3) the subrogor, i.e. Teloptic, has a right that it could enforce against a third party and that the subrogee, i.e. Grinnell, seeks to enforce the subrogor's right; and 4) the potential subrogee did not act as a "volunteer" in paying the claim or debt of the subrogor. American National Bank and Trust Co. of Chicago v. Weyerhaeuser Co., 692 F.2d 455, 460-461 (7th Cir. 1982) (applying Illinois law). The defendants argue that Grinnell has not pled that it paid any claim or debt in full and has not pled that the defendants are liable for and proximately caused the debt. (Dft's Mem. of Law, p. 13). Grinnell clearly pled that it paid Teloptic's claim or debt when it pled that the trial court ordered Grinnell to be garnished the $300,000 plus costs and interest for the default judgment. See Complaint ¶¶ 38-39. Grinnell has also clearly pled that the defendants are liable for and proximately caused the $300,000 default judgment. See Complaint ¶¶ 51, 68, 86. ("As a direct and proximate result of DEFENDANTS' negligence and these breaches, and despite the existence of viable and meritorious defense, the $300,000 judgment was taken against TELOPTIC, and GRINNELL has been ordered by the trial court to pay the $300,000 judgment against TELOPTIC as TELOPTIC's insurer."). Therefore, Grinnell has pled equitable subrogation rights to Teloptic's legal malpractice claims against the defendants and defendants motion to dismiss as to Count I is denied.
Count II
The defendants argue that Grinnell has pled neither a direct or third-party beneficiary duty of care. (Dft's Mem. of Law, pp. 5-7). The court agrees with the defendant that Grinnell has not pled a direct duty of care. Illinois law clearly recognizes that there is a tripartite relationship between the insured, the insurer, and the attorney retained by the insurer. See e. Maryland Cas. Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24, 30-31 (1976); Cincinnati Co. v. West American Ins. Co., 287 Ill. App.3d 505, 513, 679 N.E.2d 91, 96 (2nd Dist. 1997); Nandorf v. CNA Ins. Co., 134 Ill. Appl.3d 134, 137, 479 N.E.2d 988, 991 (1st Dist. 1985). The attorney retained by the insurer to represent the insured has a fiduciary duty to both the insurer and the insured. Maryland Cas. Co., 355 N.E.2d at 30-31. Thus, either the insured or the insurer can sue the attorney for malpractice. See Smiley v. Manchester Ins. Indemnity Co. of St. Louis, 71 Ill.2d 306, 375 N.E.2d 118 (1978). However, in the present case, Grinnell did not allege that they themselves retained the defendants as attorneys (either for themselves or Teloptic), but that Teloptic retained the defendants. See Complaint ¶ 17. Therefore, Grinnell has not pled a direct duty of care.
However, Grinnell has pled a third-party beneficiary duty of care. The Illinois Supreme Court has recognized that a third party can plead a duty of care by the defendant attorney if they allege that the third party was the intended beneficiary of the relationship between the client and the attorney. Pelham v. Griesheimer, 92 Ill.2d 12, 440 N.E.2d 96, 99-100 (1982) ("The key consideration is the attorney's acting at the direction of or on behalf of the client to benefit or influence a third party."). Grinnell has alleged that Teloptic retained the defendants in order to defend against the default judgment entered against Teloptic, for which Grinnell was garnished. If the defendants had put forward a successful defense in the Wilson litigation, Grinnell alleges, Teloptic would not have been found liable and Grinnell would have no indemnity obligations. See Complaint ¶¶ 35, 36, 51, Ex. B. These allegations are enough to support third-party beneficiary duty of care. The defendants' Motion to Dismiss as to Count II is denied.
Count III
The defendants argue that Grinnell's claim of promissory estoppel should be dismissed, for Grinnell did not want the default order in theWilson litigation vacated and the claim is internally inconsistent. (Dft's Mem. of Law, pp. 17-19).
In order to allege a promissory estoppel claim, Grinnell must allege that (1) the defendants made an unambiguous promise to Grinnell; (2) Grinnell relief on such a promise; (3) Grinnell's reliance was expected and foreseeable by the defendants; (4) Grinnell relied on the promise to it detriment. Doyle v. Holy Cross Hospital. 186 Ill.2d 104, 120, 708 N.E.2d 1140, 1148 (1999). The defendants argue that Grinnell cannot allege that they relied upon any promise from the defendants to vacate the default order because Grinnell did not want the default order vacated. The defendants assert that Grinnell took the position in the garnishment proceeding that Grinnell elected not to provide coverage, including the defense of Teloptic in the Wilson litigation, because Teloptic had been defaulted. (Dft's Mem. of Law, p. 17). However, the defendants do not present any evidence to support this assertion. The defendants also argue that Grinnell's promissory estoppel claim is internally inconsistent, for Count III incorporates by reference the allegations that the defendants owed Gmnnell a duty of care. (Dft's Mem. of Law, p. 18). However, the defendants themselves admit that promissory estoppel can be proved either with or without proof of duty of care. See Dft's Mem. of Law, p. 19, citing Hacker v. Holland, 570 N.E.2d 951, 956 n. 7 (1991). Therefore, Grinnell's claim of promissory estoppel is not internally inconsistent and the defendants motion to dismiss as to Count III is denied.
Even if the defendants presented such evidence, it would not be appropriate for a motion to dismiss, since it would be extrinsic evidence. The district court is confined to the pleadings when considering a motion to dismiss. In re Wade, 969 F.2d 241, 249 (7th Cir. 1992).
Conclusion
For the foregoing reasons, defendants Franks, Gerkin MeKenna and Todd W. Syverson "s motion to dismiss the plaintiff Grinnell Mutual Reinsurance Company's three count complaint of legal malpractice is DENIED.