Pace Communications Services Corp. v. Express Products, Inc. , 2014 WL 4460496 ( 2014 )

Illinois Official Reports
Appellate Court
Pace Communications Services Corp. v. Express Products, Inc.,
2014 IL App (2d) 131058
Appellate Court PACE COMMUNICATIONS SERVICES CORPORATION and
Caption TUNICA PHARMACY, INC., Individually and as the
Representatives of a Class of Similarly Situated Persons, Plaintiffs
and Citation Petitioners-Appellants, v. EXPRESS PRODUCTS, INC.,
Defendant (Cumberland Mutual Fire Insurance Company, Citation
Respondent-Appellee).
District & No. Second District
Docket No. 2-13-1058
Filed September 10, 2014
Held In citation proceedings against defendant’s insurer seeking to recover
(Note: This syllabus the settlement of an underlying action against defendant for violations
constitutes no part of the of the Telephone Consumer Protection Act based on defendant’s
opinion of the court but faxing of unsolicited advertisements where the parties agreed that
has been prepared by the plaintiffs would pursue the judgment from defendant’s insurer, not
Reporter of Decisions defendant, the trial court properly denied plaintiffs’ motion for
for the convenience of summary judgment and dismissed the citation pursuant to the motion
the reader.) filed by defendant’s insurer, since defendant’s insurer had obtained
summary judgment in a Pennsylvania federal district court based on a
holding that, under Pennsylvania law, defendant’s insurer had no duty
to defend or indemnify defendant under the relevant insurance
policies, the insurer’s federal action was initiated prior to the
settlement of plaintiffs’ action, and the insurer was not estopped from
raising any policy defense.
Decision Under Appeal from the Circuit Court of Lake County, No. 04-L-1043; the
Review Hon. Diane E. Winter, Judge, presiding.
Judgment Affirmed.
Counsel on Brian J. Wanca and David M. Oppenheim, both of Anderson &
Appeal Wanca, of Rolling Meadows, and Phillip A. Bock, of Bock & Hatch,
LLC, of Chicago, for appellants.
James P. Moran and Stephen A. Rehfeldt, both of Mulherin, Rehfeldt
& Varchetto, P.C., of Wheaton, and Michael A. Hamilton, Louis H.
Kozloff, and Mark H. Rosenberg, all of Nelson Levine de Luca &
Hamilton LLC, of Blue Bell, Pennsylvania, for appellee.
Panel JUSTICE SPENCE delivered the judgment of the court, with opinion.
Justices McLaren and Jorgensen concurred in the judgment and
opinion.
OPINION
¶1 Pace Communications Services Corporation and Tunica Pharmacy, Inc., represented a
class of similarly situated persons (collectively, plaintiffs) in a class action (the class action)
against Express Products, Inc. (Express), for, among other allegations, violations of the
Telephone Consumer Protection Act of 1991 (TCPA) (47 U.S.C. § 227 (2000)). Cumberland
Mutual Fire Insurance Company (Cumberland) was one of Express’s insurers. While
plaintiffs were litigating the class action in the circuit court of Lake County, Cumberland
sought in the United States District Court for the Eastern District of Pennsylvania a
declaration that it had no duty to defend or indemnify Express (the federal action). Plaintiffs
and Express settled the class action in 2009 for about $8 million, with plaintiffs agreeing to
pursue the judgment not from Express but only from Express’s insurers. Accordingly,
plaintiffs filed under section 2-1402 of the Code of Civil Procedure (Code) (735 ILCS
5/2-1402 (West 2010)) a citation to discover Cumberland’s assets (the citation proceeding) in
an effort to recover the judgment.
¶2 In September 2011, while the citation proceeding was still pending, the district court
found that Cumberland did not have a duty to defend or indemnify Express. Plaintiffs moved
for summary judgment in the citation proceeding, and Cumberland moved to dismiss based
on the declaratory judgment. The circuit court denied plaintiffs’ motion for summary
judgment and granted Cumberland’s motion to dismiss, finding that the declaratory judgment
precluded relitigating whether Cumberland had a duty to indemnify Express. Plaintiffs appeal
from the dismissal of the citation proceeding, and for the reasons set forth herein, we affirm.
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¶3 I. BACKGROUND
¶4 Plaintiffs filed the class action in December 2004, alleging that Express violated
provisions of the TCPA by faxing unsolicited advertisements to persons and companies in
Illinois and other states without the recipients’ consent. Cumberland had issued Express
sequential annual liability policies covering the period during which the alleged violations
occurred.
¶5 Express notified Cumberland of the class action via a February 22, 2006, letter. On April
11, 2006, Cumberland responded that it was declining coverage, asserting that the faxes that
plaintiffs allegedly received were not sent during the policy periods. On April 20, 2007,
Cumberland revisited its decision to decline coverage and agreed to participate in Express’s
defense, under a reservation of rights.
¶6 On June 20, 2008, Cumberland filed the federal action. On June 24, 2009, Express moved
for judgment on the pleadings, because Cumberland had not joined plaintiffs as necessary
parties to the federal action, and the district court denied the motion.
¶7 Meanwhile, in May 2009, Express agreed with plaintiffs to settle the class action for just
under $8 million.1 After Express filed a “Motion for Preliminary Approval of the Class
Action Settlement Agreement and Notice to the Class” on June 15, 2009, Cumberland sent
Express a letter stating that under the insurance policies, Express could not, except at its own
cost, assume any obligation or incur any expense (other than for first aid) without
Cumberland’s consent. On October 13, 2009, following a fairness hearing, the circuit court
entered its “Final Approval of Settlement Agreement and Judgment” against Express. The
settlement agreement stipulated that plaintiffs would seek recovery against only Express’s
two insurers, Cumberland and Maryland Casualty Company. It further stipulated that
plaintiffs’ counsel would undertake, at no cost to Express, the defense of Express in its
coverage lawsuits, which included the federal action. Consequently, plaintiffs’ counsel joined
Express’s defense in the federal action and argued its eventual appeal.
¶8 In October 2009, following the entry of the judgment against Express, plaintiffs filed the
citation proceeding. Cumberland filed a motion to dismiss the citation proceeding for lack of
personal jurisdiction in Illinois and, in the alternative, to dismiss or stay the action due to the
pending federal action. The circuit court denied Cumberland’s motion, and Cumberland
appealed to this court, challenging only the determination of personal jurisdiction. We
affirmed the circuit court’s finding of personal jurisdiction. Pace Communications Services
Corp. v. Express Products, Inc., 408 Ill. App. 3d 970, 980 (2011).
¶9 Meanwhile, in the federal action, on January 8, 2010, Express filed a second motion for
judgment on the pleadings, arguing, among other things, that it had no further interest in the
federal action and no incentive to litigate, because it had settled the class action with
plaintiffs. The district court ordered that the motion be treated as one for summary judgment
and it directed Cumberland to file its own motion for summary judgment with respect to the
coverage dispute. In September 2011, the district court denied Express’s summary judgment
1
The precise judgment Express agreed to was for $7,999,996. In approving the settlement, the trial
court found that Express faxed 41,064 advertisements (out of 125,191 advertisements faxed to the
entire class) during the 2002 and 2003 coverage periods. The TCPA allows for liquidated damages of
$500 per violation. 47 U.S.C. § 227(b)(3)(B) (2000).
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motion and granted Cumberland’s, holding that, under Pennsylvania law, Cumberland did
not have a duty to defend or indemnify Express under the relevant insurance policies.
Maryland Casualty Co. v. Express Products, Inc., Nos. 09-857, 08-2909, 2011 WL 4402275
(E.D. Pa. Sept. 22, 2011). The United States Court of Appeals for the Third Circuit dismissed
Express’s appeal as untimely. Cumberland Mutual Fire Insurance Co. v. Express Products,
Inc., 529 F. App’x 245, 252-53 (3d Cir. 2013).
¶ 10 On remand in the citation proceeding, plaintiffs moved for summary judgment, arguing
that Cumberland had a duty to indemnify Express in the class action and therefore was
required to pay the judgment. The circuit court denied plaintiffs’ motion because it found that
plaintiffs were bound by the declaratory judgment in the federal action. For the same reason,
on September 24, 2013, the circuit court granted Cumberland’s motion to dismiss the citation
proceeding.
¶ 11 Plaintiffs timely appealed.
¶ 12 II. ANALYSIS
¶ 13 Although plaintiffs argue multiple issues on appeal, if relitigation of Cumberland’s duty
to indemnify Express is barred by collateral estoppel, we need not reach plaintiffs’ arguments
as to whether Cumberland had a duty to indemnify Express or whether the settlement
agreement between plaintiffs and Express was reasonable. Accordingly, we begin by
addressing whether the declaratory judgment in the federal action bars relitigation of
Cumberland’s duty to indemnify Express and thus defeats the citation proceeding.
¶ 14 A. Standard of Review
¶ 15 We first note that it was not the claim to discover Cumberland’s assets that the circuit
court found barred but, rather, the issue of Cumberland’s duty to indemnify Express.
Regardless, the application of both “true res judicata” (claim preclusion) and collateral
estoppel (issue preclusion) are legal questions, which we review de novo. Lieberman v.
Liberty Healthcare Corp., 408 Ill. App. 3d 1102, 1108 (2011); see Hayes v. State Teacher
Certification Board, 359 Ill. App. 3d 1153, 1161 (2005) (res judicata separated into two
distinct doctrines). The issue of Cumberland’s duty to indemnify Express was dispositive in
the circuit court’s grant of Cumberland’s motion to dismiss and denial of plaintiffs’ motion
for summary judgment. We review de novo a ruling on a motion to dismiss generally or a
motion for summary judgment. Simmons v. Homatas, 236 Ill. 2d 459, 477 (2010) (“A grant
or denial of a motion to dismiss is a question of law that we review de novo.”); American
States Insurance Co. v. CFM Construction Co., 398 Ill. App. 3d 994, 998 (2010) (“The
appellate court applies a de novo standard of review to the trial court’s grant or denial of a
summary judgment motion.”); see Eclipse Manufacturing Co. v. United States Compliance
Co., 381 Ill. App. 3d 127, 134 (2007) (turnover order arising from section 2-1402 proceeding
was subject to de novo review). Moreover, we review a choice-of-law issue de novo. G.M.
Sign, Inc. v. Pennswood Partners, Inc., 2014 IL App (2d) 121276, ¶ 25.
¶ 16 B. Collateral Estoppel
¶ 17 Plaintiffs submit three reasons why the federal declaratory judgment does not have
preclusive effect in the citation proceeding: (1) the declaratory judgment is void under
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Pennsylvania law; (2) the law-of-the-case doctrine establishes that the declaratory judgment
does not bind plaintiffs; and (3) the declaratory judgment does not meet the requirements for
collateral estoppel to apply. We address each argument in turn.
¶ 18 1. Whether the Declaratory Judgment is Void
¶ 19 Plaintiffs argue that the declaratory judgment is void because, under Pennsylvania law,
underlying tort plaintiffs have a substantial independent interest in insurance coverage and
are therefore necessary parties to coverage actions, such as the federal action. See Vale
Chemical Co. v. Hartford Accident & Indemnity Co., 516 A.2d 684, 687-88 (Pa. 1986)
(underlying tort plaintiffs were necessary parties to state declaratory judgment action
between insurers and the underlying defendant-insured); Richards v. Trimbur, 543 A.2d 116,
119 (Pa. Super. Ct. 1988) (where personal injury plaintiff is not joined to a state declaratory
judgment action between insurer and insured over coverage, the court lacks jurisdiction to
enter a declaratory judgment). Plaintiffs contend that the declaratory judgment here had no
preclusive effect because it was entered by a court lacking subject matter jurisdiction, i.e., the
judgment is void under Pennsylvania law.
¶ 20 The Erie doctrine provides that a federal court sitting in diversity (28 U.S.C. § 1332
(2006)) is to apply state substantive law and federal procedural law. Chamberlain v.
Giampapa, 210 F.3d 154, 158 (3d Cir. 2000) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64,
78 (1938)). Plaintiffs’ argument implicitly assumes that, as in Vale, section 7540 of the
Pennsylvania Judicial Code (PA Code) (42 Pa. Cons. Stat. Ann. § 7540 (West 2010)) was
applicable substantive law such that their joinder in the federal action was a jurisdictional
necessity. However, Vale does not speak to declaratory judgment actions brought in federal
court pursuant to section 2201 of Title 28 (28 U.S.C. § 2201 (2006)), but rather applies only
to actions brought in state court pursuant to section 7540 of the PA Code. See Liberty Mutual
Insurance Co. v. Treesdale, Inc., 419 F.3d 216, 229 (3d Cir. 2005) (holding that Vale
addressed procedural and jurisdictional issues, not substantive principles of law, and that thus
Erie did not require the district court to apply Pennsylvania law to underlying plaintiffs’
petition to intervene in insurance coverage dispute). Therefore, while section 7540 requires
that “[w]hen declaratory relief is sought, all persons shall be made parties who have or claim
any interest which would be affected by the declaration” (42 Pa. Cons. Stat. Ann. § 7540(a)
(West 2010)), it applies only in Pennsylvania state court actions, not in a federal diversity
action as here.
¶ 21 The relevant procedures in federal court are found in the Federal Rules of Civil Procedure
(FRCP) and section 2201. Section 2201 does not contain a provision similar to section
7540(a) of the PA Code requiring all interested persons be made parties to the action, nor
does Rule 19 of the FRCP (Fed. R. Civ. P. 19) necessarily require joinder of an underlying
plaintiff in a coverage dispute between an underlying defendant and its insurer.
¶ 22 Plaintiffs allude in their reply brief to the “outcome-determination” test. See Hanna v.
Plumer, 380 U.S. 460, 467-68 (1965); Guaranty Trust Co. of New York v. York, 326 U.S. 99,
109 (1945). They argue that allowing Cumberland to “run” to federal court to “avoid” state
court is in direct violation of the Erie doctrine. However, they do not explain why the
outcome of this case would be different if the declaratory judgment had come from a state
court. The district court applied Pennsylvania contract law (see Maryland Casualty Co., 2011
WL 4402275, at *10), the same substantive law that a Pennsylvania state court would have
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applied in deciding whether the insurance policies required Cumberland to defend or
indemnify Express. Although Rule 19 and section 2201 did not require joinder, the
“touchstone” of Erie is whether the federal rule “significantly affect[s] the result of a
litigation,” regardless of whether it is technically a rule of procedure or substance. (Internal
quotation marks omitted.) Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance
Co., 559 U.S. 393, 406 (2010). We cannot say, nor have plaintiffs argued, that the district
court would have interpreted the contracts differently had it been required to join plaintiffs in
the federal action. Simply, the choice of joinder rules did not affect Express’s substantive
rights in an outcome-determinative way.
¶ 23 Under the Erie doctrine, the district court was not required to follow the Pennsylvania
law that would have required joining plaintiffs to the dispute, and the applicable federal law
did not require joinder. Therefore, we find unavailing plaintiffs’ argument that the
declaratory judgment is void for failure to join plaintiffs.
¶ 24 2. Whether the Law of the Case Prevented Application of Issue Preclusion
¶ 25 Plaintiffs argue that, even if the declaratory judgment is not void, the law-of-the-case
doctrine established that the declaratory judgment did not apply against plaintiffs. Plaintiffs
contend that Cumberland argued the issue of whether the declaratory judgment bound
plaintiffs when it argued its motion to dismiss based on a lack of personal jurisdiction or
alternatively to stay or dismiss because of the concurrently pending federal action. The
circuit court denied the motion, reasoning that the federal action was not between the same
parties and thus did not bar the concurrent Illinois proceeding. Plaintiffs contend, therefore,
that the circuit court already settled the issue of whether they were bound by the outcome of
the federal action, finding that they were not, and that the law-of-the-case doctrine barred the
subsequent determination that plaintiffs were bound by the federal declaratory judgment.
¶ 26 The law-of-the-case doctrine generally bars relitigation of an issue previously decided in
the same case. Krautsack v. Anderson, 223 Ill. 2d 541, 552 (2006); People v. Patterson, 2013
IL App (2d) 120359, ¶ 15. Moreover, when a question could have been raised on a prior
appeal but was not, that question is deemed forfeited. Kreutzer v. Illinois Commerce
Comm’n, 2012 IL App (2d) 110619, ¶ 37. Plaintiffs argue that Cumberland could have raised
the issue of the declaratory judgment’s preclusive effect when it appealed the circuit court’s
finding of personal jurisdiction over it (see Pace Communications Services Corp., 408 Ill.
App. 3d at 980), but that it did not and thus the issue is forfeited and barred.
¶ 27 We need not determine whether Cumberland forfeited the issue–or whether the issue
could have been raised in Cumberland’s appeal–because whether the declaratory judgment
bound plaintiffs is a separate issue from the denial of the motion to dismiss the citation
proceeding. See American Service Insurance Co. v. China Ocean Shipping Co. (Americas),
Inc., 2014 IL App (1st) 121895, ¶ 17 (“[A] ruling will not be binding in a subsequent stage of
litigation when different issues are involved ***.”). Cumberland moved to dismiss under
section 2-619(a)(3) (735 ILCS 5/2-619(a)(3) (West 2010)), which allows dismissal where
“there is another action pending between the same parties for the same cause.” (Emphasis
added.) The circuit court denied the motion because the federal action did not involve the
same parties: the federal action was between Express and Cumberland, and the citation
proceeding was between plaintiffs and Cumberland.
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¶ 28 Cumberland argues that the circuit court recognized that, under Pennsylvania law, 2 the
parties did not have to be identical for the declaratory judgment to have preclusive effect.
However, the “same parties” requirement under section 2-619(a)(3) likewise does not require
that the parties be identical, only that their interests be sufficiently similar. May v. SmithKline
Beecham Clinical Laboratories, Inc., 304 Ill. App. 3d 242, 247 (1999). Regardless, the
circuit court faced two separate and distinct issues: (1) whether the citation proceeding
should have been stayed or dismissed due to the concurrent federal action; and (2) whether
the declaratory judgment precluded plaintiffs’ litigation of the issue of coverage. By ignoring
that these were separate and distinct issues, plaintiffs improperly conflate section
2-619(a)(3)’s requirement of the “same parties” with Pennsylvania law’s requirement that the
same parties or their privies be involved in both litigations for issue preclusion to apply (see
Rue v. K-Mart Corp., 713 A.2d 82, 84 (Pa. 1998)). The circuit court had to determine under
Pennsylvania law whether the requirements of collateral estoppel were satisfied, regardless of
its ruling on the motion to dismiss. See Scheffel & Co. v. Fessler, 356 Ill. App. 3d 308,
312-13 (2005) (law of the case not applicable when different issues involved; two different
restrictions in restrictive covenant agreement were separate issues); Lake Bluff Heating & Air
Conditioning Supply, Inc. v. Harris Trust & Savings Bank, 117 Ill. App. 3d 284, 290-91
(1983) (rulings on a party’s obligation to convey title and on its obligation to repair were
different issues, rendering law-of-the-case doctrine inapplicable). In other words, the court
did not previously decide whether the outcome of the federal action bound plaintiffs on the
issue of coverage. We therefore reject the argument that the law-of-the-case doctrine applies
here.3
¶ 29 3. Whether Issue Preclusion Applied
¶ 30 Plaintiffs argue that, even if the declaratory judgment is not void and the law-of-the-case
doctrine does not apply, the issue of Cumberland’s duty to indemnify Express was not barred
by collateral estoppel. They argue that the declaratory judgment did not preclude relitigation
of the issue because: (1) the district court did not have personal jurisdiction over plaintiffs;
(2) the issue in the federal action was not identical to the issue here; (3) plaintiffs were not
parties to the federal action or in privity with Express; and (4) Express had no incentive to
litigate the federal action.
¶ 31 Before addressing these arguments, however, we must determine what law we are to
apply. The foreign judgment here was not rendered by another state court–and thus this is not
an issue of full faith and credit (Semtek International Inc. v. Lockheed Martin Corp., 531
2
As discussed in the next section, Pennsylvania law applies to the determination of whether
collateral estoppel applied.
3
Additionally, the application of the law-of-the-case doctrine requires a final judgment. People v.
Patterson, 154 Ill. 2d 414, 469 (1992). A denial of a motion to dismiss, as occurred here, is an
interlocutory order, which “may be modified or revised by a successor court at any time prior to final
judgment.” Commonwealth Edison Co. v. Illinois Commerce Comm’n, 368 Ill. App. 3d 734, 742
(2006). Therefore, the law-of-the-case doctrine did not apply not only because the issues were not the
same, but also because, even if the issues had been the same, the court’s denial of the motion to dismiss
was not final.
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U.S. 497, 506-07 (2001))–but was instead rendered by a federal court sitting in diversity
jurisdiction. Therefore, under Semtek, the declaratory judgment has the same preclusive
effect judgment as would a judgment of a court of the state in which the federal court sat: that
is, we apply Pennsylvania law. Id. at 508.
¶ 32 a. Personal Jurisdiction
¶ 33 Plaintiffs argue that the district court did not have personal jurisdiction over them in the
federal action. Due process requires that a party have minimum contacts with the forum state
for a court to exercise personal jurisdiction over it (International Shoe Co. v. Washington,
326 U.S. 310, 316 (1945)), and here plaintiffs did not avail themselves of the privilege of
conducting activities within the forum state, nor did Cumberland even attempt to obtain
personal jurisdiction over them. Therefore, plaintiffs argue, Cumberland’s use of the
declaratory judgment against them in the citation proceeding violated due process.
¶ 34 Cumberland is correct that plaintiffs’ argument is a red herring. Under Pennsylvania law,
collateral estoppel may apply when “the party against whom the plea is asserted was a party
or in privity with a party in the prior case.” (Emphasis added.) Office of Disciplinary Counsel
v. Kiesewetter, 889 A.2d 47, 50 (Pa. 2005). Pennsylvania law has well established that being
in privity with a party to a judgment is sufficient to satisfy the identity-of-parties requirement
of collateral estoppel. See, e.g., Vignola v. Vignola, 2012 Pa. Super. 36. Personal jurisdiction
over nonparties in the prior action is unnecessary when privity is established. See Adzigian v.
Harron, 297 F. Supp. 1317, 1324 (E.D. Pa. 1969) (when enforcing a foreign judgment, court
must ask whether one of two things existed in the foreign judgment: (1) personal jurisdiction
or (2) privity).
¶ 35 In short, plaintiffs are arguing about personal jurisdiction when they should be arguing
about privity. Cumberland established issue preclusion in the circuit court under the theory
that plaintiffs were in privity with Express in the federal action. Plaintiffs’ personal
jurisdiction argument is misplaced, irrelevant to our analysis, and we therefore disregard it.
¶ 36 b. Elements of Collateral Estoppel
¶ 37 Plaintiffs’ three remaining arguments all attack whether the elements of collateral
estoppel were satisfied in this case. As noted, we review de novo the application of collateral
estoppel (Lieberman, 408 Ill. App. 3d at 1108), and we now examine whether the elements of
collateral estoppel were present in this case.
¶ 38 Collateral estoppel (or issue preclusion)4 applies under Pennsylvania law if:
“(1) the issue decided in the prior case is identical to the one presented in the later
case; (2) there was a final judgment on the merits; (3) the party against whom the plea
is asserted was a party or in privity with a party in the prior case; (4) the party or
person privy to the party against whom the doctrine is asserted had a full and fair
opportunity to litigate the issue in the prior proceeding and (5) the determination in
4
Like Illinois, Pennsylvania uses the terms “issue preclusion” and “collateral estoppel”
interchangeably. See Hebden v. Workmen’s Compensation Appeal Board (Bethenergy Mines, Inc.),
632 A.2d 1302, 1304 (Pa. 1993).
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the prior proceeding was essential to the judgment.” R.W. v. Manzek, 888 A.2d 740,
748 (Pa. 2005).
Plaintiffs first argue that the issues were not identical between the federal action and the
citation proceeding. Plaintiffs’ basis for this argument is that the circuit court relied on a
Third Circuit holding that predicted Pennsylvania law, rather than relying on Pennsylvania
precedent. They cite Pekin Insurance Co. v. XData Solutions, Inc., 2011 IL App (1st)
102769, ¶¶ 22-23, to argue that, since there was no Pennsylvania precedent contrary to the
relevant Illinois law, the circuit court did not need to predict Pennsylvania law but instead
should have applied Illinois law.
¶ 39 This argument is another red herring. Plaintiffs are arguing about what law should be
applied to the issue of coverage, but what we must ask is whether the issue was the same in
the federal action and the citation proceeding, not what law should decide it. See Rue, 713
A.2d at 85. The issues in both the federal action and the citation proceeding were identical,
that is, whether Cumberland had a duty to indemnify Express. What law applies to decide
that issue is inapposite. In fact, plaintiffs’ argument betrays its position: arguing which state’s
law applies to the same coverage issue assumes that the issue is identical. Accordingly, we
reject plaintiffs’ argument and find that the first element, identity of issues, was met.
¶ 40 As to whether there was a final judgment on the merits, plaintiffs argue only that the
declaratory judgment is void, an argument we disposed of supra. Therefore, because the
district court entered a final, declaratory judgment, the second element was met.
¶ 41 Plaintiffs take exception to the third element, arguing that they were neither parties nor
privies to the federal action. They argue as follows. Privity requires “an identification of
interest of one person with another as to represent the same legal right.” (Internal quotation
marks omitted.) Catroppa v. Carlton, 2010 Pa. Super. 85, ¶ 9. For purposes of collateral
estoppel, privity requires more than the mere fact that persons be “interested in the same
question or in proving the same facts.” (Internal quotation marks omitted.) Bergdoll v.
Commonwealth of Pennsylvania, 858 A.2d 185, 197 n.4 (Pa. Commw. Ct. 2004). Under
Pennsylvania law, a coverage action is not a private matter between the insurer and the
insured; the injured third party has an interest in the action, and the insurer cannot cut off
rights against the injured third party merely by obtaining a judgment against the insured. See
Vale, 516 A.2d at 686-88 (underlying plaintiff had an interest in declaratory judgment action
between underlying defendant and its insurer).5 Vale supports the proposition that plaintiffs
have rights concerning coverage, independent of Express. These independent rights could not
be extinguished by the judgment secured by Cumberland against Express alone. Moreover,
the settlement agreement between plaintiffs and Express did not include an assignment of
rights but only guaranteed Express the benefit of legal representation by plaintiffs’ counsel.
In the context of collateral estoppel, Pennsylvania has rejected the notion that counsel is in
privity with a represented party. See Ammon v. McCloskey, 655 A.2d 549, 554 (Pa. Super.
Ct. 1995) (finding defendant lawyer was not in privity with his client from a prior action for
purposes of collateral estoppel, where assignee of that client subsequently sued the lawyer for
malpractice and sought to estop the lawyer from arguing whether the client waived a certain
5
Plaintiffs cite many more cases, but those cases are from Illinois. Under Semtek, Pennsylvania law
controls the application of collateral estoppel in this case, and we therefore look only to Pennsylvania
law to interpret privity.
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defense in the prior action). Accordingly, the fact that plaintiffs’ counsel provided Express
with legal representation is not enough to establish privity between plaintiffs and Express for
purposes of collateral estoppel.
¶ 42 Cumberland responds as follows. Privity is established when “a substantive legal
relationship exists *** that binds the nonparty” (Nationwide Mutual Fire Insurance Co. v.
George V. Hamilton, Inc., 571 F.3d 299, 312 (3d Cir. 2009)), and a contract can satisfy that
relationship (id. at 311). Here, the circuit court correctly determined that the settlement
agreement created a substantive legal relationship between plaintiffs and Express, which
established privity for purposes of collateral estoppel. The settlement agreement limited
plaintiffs to recovery from Express’s insurers and stipulated that plaintiffs and Express would
cooperate in obtaining payment of the judgment from Cumberland. Furthermore, the
settlement agreement provided that “Plaintiffs and their counsel will undertake, at no cost to
[Express], the defense of Express in the four coverage lawsuits,” including actions to recover
against Cumberland, and that Express would waive conflicts of interest with respect to
plaintiffs’ counsel’s representation of it in those lawsuits. In fact, plaintiffs’ counsel did
provide representation to Express, appearing “Of Counsel” in the federal action and being
listed as attorneys before the Third Circuit on Express’s appeal. In effect, the settlement
agreement provided that plaintiffs would be responsible for protecting their interest in
recovery through defense of Express in coverage suits and prosecution for Express in
recovery suits. This established privity between plaintiffs and Express for purposes of
collateral estoppel.
¶ 43 Cumberland also argues that plaintiffs’ status as Express’s judgment creditors established
privity between them. A judgment creditor stands in the shoes of the insured and is bound by
a prior action involving the insured’s rights under an insurance policy. See American Surety
Co. of New York v. Dockson, 28 A.2d 316, 319 (Pa. 1942) (elucidating who is a party in
privity for purposes of res judicata by stating that those in privity include “attaching
creditors”); T.A. v. Allen, 2005 Pa. Super. 49, ¶ 11 (an insured’s judgment creditors were
precluded from pursuing garnishment action against insurer following declaratory judgment
establishing that the insurer had no duty to indemnify the insured).6
¶ 44 We agree with Cumberland. Ammon is not helpful in this case, because it presented a
wholly different context: whether a lawyer was in privity with a former client for purposes of
collateral estoppel in a legal malpractice action that was brought by the former client’s
assignee. Here, it is irrelevant whether plaintiffs’ lawyers were in privity with anyone.
Rather, we must determine whether plaintiffs themselves were in privity with Express in the
federal action. The proper question is whether the settlement agreement established a
substantive legal relationship between plaintiffs and Express sufficient to find privity under
Pennsylvania law (see Nationwide Mutual Fire Insurance Co., 571 F.3d at 311), and the fact
that plaintiffs agreed to have their counsel represent Express, at no cost to Express, to defend
coverage suits and prosecute recovery actions supported that the settlement agreement
established such a legal relationship. Furthermore, Vale, as discussed supra, does not aid us.
6
We note, however, that in Allen the judgment creditor was a party to the declaratory judgment
action that established that the insurer did not owe a duty to indemnify the insured. Allen, 2005 PA
Super 49, ¶ 2.
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Vale interpreted section 7540 of the PA Code–which did not apply to the federal action–and
was based on procedure, not on an interpretation of a litigant’s substantive rights.
¶ 45 The circuit court properly found that the settlement agreement established privity
between plaintiffs and Express. The agreement created a substantive legal relationship
between them in substance if not form. The quid pro quo of the agreement was that Express
agreed to a judgment entered against it, and plaintiffs agreed not to pursue recovery from
Express and agreed to defend Express in coverage disputes and prosecute recovery actions,
through their counsel. Plaintiffs stepped into Express’s shoes by assuming responsibility for
Express’s rights and obligations. As stated in Ammon, privity in its broadest sense includes
“such an identification of interest of one person with another as to represent the same legal
right.” (Internal quotation marks omitted.) Ammon, 655 A.2d at 554. The agreement perfectly
aligned plaintiffs’ interests with Express’s. Regardless of Express’s incentive to litigate–an
issue we address infra–plaintiffs’ and Express’s interests were the same, that is, both
plaintiffs’ and Express’s legal interest in the federal action was a finding that Cumberland
owed a duty to indemnify Express. Accordingly, the third element of collateral estoppel is
satisfied.7
¶ 46 Plaintiffs next argue that the fourth element was not met, in that they did not have a full
and fair opportunity to litigate the issue of coverage in the federal action. They contend that
Express had no economic incentive to litigate the issue in the federal action. See Rue, 713
A.2d at 86 (discussing the intersection of an incentive to litigate and collateral estoppel).
They cite Express’s pleadings in the federal action where Express explained that, under the
terms of the settlement agreement, the interest in coverage from Cumberland shifted from it
to plaintiffs. The pleadings further asserted that Express no longer had an interest in coverage
and that, because plaintiffs were not parties to the federal action, any opinion the district
court rendered would be purely advisory.
¶ 47 Plaintiffs’ argument ignores the quid pro quo of the settlement agreement, elevating form
over substance. Plaintiffs agreed that their counsel would defend Express, at no cost to
Express, in coverage disputes, and they undertook the recovery efforts against Cumberland at
their sole expense. Plaintiffs’ position would effectively give them two bites at the same
apple: if Express, represented by plaintiffs’ counsel in the federal action, were to lose (as it
ultimately did), plaintiffs would get a second chance to litigate the issue of coverage in the
citation proceeding. This is exactly the type of undesirable relitigation that collateral estoppel
bars. See Meridian Oil & Gas Enterprises, Inc. v. Penn Central Corp., 614 A.2d 246, 251
(Pa. Super. Ct. 1992). The settlement agreement effectively linked Express’s incentive to
litigate with that of plaintiffs, as evidenced by plaintiffs’ agreement to assume the defense of
Express in coverage disputes. Accordingly, we reject plaintiffs’ argument and hold that the
fourth element was met.
7
Moreover, Pennsylvania case law supports that, as a matter of law and without need to reference
an agreement between the persons involved, creditors are in privity with their debtors for purposes of
res judicata. See American Surety Co. of New York, 28 A.2d at 319; Munoz v. Sovereign Bank, 323 F.
App’x 184, 188 (3d Cir. 2009) (explaining that Pennsylvania law requires an identity of parties for
application of res judicata, which includes those in privity with parties, and those in privity include
attaching creditors). While American Surety Co. of New York and Munoz addressed claim preclusion,
not issue preclusion, we note that issue preclusion is an even broader concept than claim preclusion.
Catroppa, 2010 Pa. Super. 85, ¶ 6.
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¶ 48 Plaintiffs do not dispute the fifth element, that the coverage issue was essential to the
declaratory judgment. The federal action was an action to determine whether Cumberland
owed coverage to Express. Not only was the issue of coverage essential to the judgment but,
in fact, it was the judgment–that Cumberland was not obliged to cover Express under the
policies. Accordingly, we hold that the fifth element was met.
¶ 49 As all the elements were met, the circuit court properly applied collateral estoppel in the
citation proceeding, with respect to its rulings on both plaintiffs’ summary judgment motion
and Cumberland’s motion to dismiss. Furthermore, because collateral estoppel applied, we
need not address plaintiffs’ further arguments that Cumberland owed a duty to indemnify
Express and that the settlement amount, for which Cumberland otherwise would have had to
indemnify Express, was reasonable.
¶ 50 C. Breach of Duty to Defend
¶ 51 Plaintiffs argue that Cumberland was estopped from raising any policy
defense–including, they assume, collateral estoppel–in the citation proceeding, because it
breached its duty to defend. Under Employers Insurance of Wausau v. Ehlco Liquidating
Trust, 186 Ill. 2d 127, 150-51 (1999), an insurer must “(1) defend the suit under a reservation
of rights or (2) seek a declaratory judgment that there is no coverage,” or it will be estopped
from raising policy defenses to coverage if it is later found to have wrongfully denied
coverage. Plaintiffs point to Cumberland’s initial denial of coverage and subsequent letter
confirming that it would defend Express under a reservation of rights. Plaintiffs claim that
Cumberland did not honor its pledge to defend under a reservation of rights and failed to pay
any defense costs. Plaintiffs acknowledge that Cumberland sought a declaratory judgment
but highlight that it did not join plaintiffs in the federal action. Moreover, they claim that the
federal action was not brought within a reasonable time. See Central Mutual Insurance Co. v.
Kammerling, 212 Ill. App. 3d 744, 749-51 (1991) (affirming that insurer’s delay in bringing
declaratory judgment action after reservation of rights–7 years after the alleged breach by the
insured took place, 10 months after it had notice of the loss, and months after it had notice of
a possible settlement of the controversy–estopped insurer from raising policy defenses).
Plaintiffs continue that estoppel “applies only where an insurer has breached its duty to
defend. Thus, a court inquires whether the insurer had a duty to defend and whether it
breached that duty.” Ehlco, 186 Ill. 2d at 151. Plaintiffs do not argue but rather assume that
Cumberland had a duty to defend.
¶ 52 Fatal to plaintiffs’ argument is that the federal action established that Cumberland did not
have a duty to defend Express. There can be no breach of a duty where there is no duty to
begin with. Moreover, Cumberland initiated the federal action to declare its lack of a duty in
June 2008, well before Express settled the class action in May 2009 (finalized in October
2009). These facts distinguish this case from Kammerling and align it with State Automobile
Mutual Insurance Co. v. Kingsport Development, LLC, 364 Ill. App. 3d 946, 961 (2006)
(finding Kammerling inapposite and a seven-month delay in seeking a declaratory judgment
reasonable because the underlying action was still ongoing at the time of filing and because
the insurer consistently denied having a duty to defend the insured). Therefore, Cumberland
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initiated an action for a declaratory judgment in a reasonable time. Accordingly, Cumberland
was not estopped from raising any policy defense.8
¶ 53 III. CONCLUSION
¶ 54 For the aforementioned reasons, we affirm the Lake County circuit court’s judgment
dismissing plaintiffs’ section 2-1402 citation to discover assets.
¶ 55 Affirmed.
8
Moreover, it is unclear that arguing the application of collateral estoppel is necessarily a policy
defense as contemplated by Ehlco. Cumberland did not have to argue under the insurance policies to
successfully present its defense, but, rather, had to establish only that the declaratory judgment met the
elements of collateral estoppel.
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