Lear Corporation v. Johnson Elec

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-2932
LEAR CORPORATION,
Plaintiff-Appellant,
v.
JOHNSON ELECTRIC HOLDINGS LIMITED and NEVADA BOND
INVESTMENT CORP. II,
Defendants-Appellees.
____________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 02 C 6704—Joan Humphrey Lefkow, Judge.
____________
ARGUED DECEMBER 4, 2003—DECIDED DECEMBER 30, 2003
____________
Before BAUER, EASTERBROOK, and EVANS, Circuit Judges.
EASTERBROOK, Circuit Judge. In 1999 Lear Corporation,
which specializes in automotive interiors, purchased UT
Automotive, Inc. (UTA), the automotive operations of
United Technologies Corporation, through an intermediary
called Nevada Bond. Lear spun off UTA’s electrical motors
division to Johnson Electric Holdings Ltd. while retaining
the balance of the business. Automobile and motors bus-
inesses come with risks of environmental liability, given
their reliance on long-lasting fluids that can leak and reach
the ground. The transactions therefore included reciprocal
2 No. 03-2932
agreements to indemnify. Nevada Bond promised to cover
any environmental costs associated with “a discontinued
operation . . . or assets no longer used . . . by UTA” as of the
closing, plus any other environmental liabilities of which it
then had notice. Lear promised to indemnify Nevada Bond
for all subsequently arising environmental liabilities. Lear
and Johnson Electric agreed to parallel arrangements. Lear
believes that, with respect to the electrical-motors assets,
all past, present, and future liabilities have been appor-
tioned between Johnson Electric and Nevada Bond, so that
even if Lear should be held liable (because it is in the chain
of title), one or the other must indemnify it. But this
generality does not identify which of the two must pay.
Each may insist that the other is responsible, leaving Lear
at risk in the meantime—and holding the bag, if either
should become insolvent.
Two years after Johnson Electric acquired United Technol-
ogies’ electric-motor business, a suit was filed in Columbus,
Mississippi. The plaintiffs contend that hazardous sub-
stances have leaked from UTA’s automobile-parts- manu-
facturing facility, which Johnson Electric now owns. The
complaint named Lear, Nevada Bond, and Johnson Electric
among the defendants. Lear and Nevada Bond took the
position that, because the Columbus plant is still operating,
and there was no actual knowledge as of 1999 of environ-
mental problems, all liability (if there turns out to be any)
rests with Johnson Electric. Lear asked Johnson Electric to
assume the defense of the suit and to admit responsibility
for indemnity. But Johnson Electric contended that Lear
(and thus Nevada Bond) had retained the liability because
any leaks came from “assets” that were no longer in use by
1999, even though an operational plant exists at the site.
Johnson Electric declined to provide Lear with either
defense or indemnity.
With Nevada Bond and Johnson Electric each insisting
that the other bears any liability, Lear filed this action
No. 03-2932 3
against both under the diversity jurisdiction, asking the
court for a declaratory judgment that one or the other must
assume the defense of the Mississippi litigation and pick up
the tab at the end. The district court dismissed the action
to the extent that Lear sought relief against Johnson
Electric, see 2003 U.S. Dist. LEXIS 9132 (N.D. Ill. May 30,
2003), and then entered a partial final judgment under Fed.
R. Civ. P. 54(b), so that Lear could take an immediate
appeal. The district court concluded that, while the Missis-
sippi litigation is pending, it is premature to determine
which firm must indemnify Lear. And although the dispute
about defense is ripe, the judge held that Johnson Electric
has an option to take over the defense (in order to protect
its interests from missteps by Lear, which lacks much
interest in the outcome) but not an obligation to do so. Lear
does not contest the latter holding on appeal but contends
that it is entitled to an immediate decision about indem-
nity.
Neither the parties nor the district judge devoted much
attention to what must be the first issue in every federal
suit: subject-matter jurisdiction. Lear is a Delaware cor-
poration with its principal place of business in Michigan.
Nevada Bond is a Nevada corporation with its principal
place of business in Connecticut (United Technologies’ home
state). So far, so good. But Johnson Electric is a foreign
entity “limited by shares” under Bermuda law with its
principal place of business (which is to say, its corporate
headquarters) in China. Until we raised the issue at oral
argument, everyone had assumed that a Bermuda “limited”
organization is just like a U.S. corporation, so that jurisdic-
tion is supplied by 28 U.S.C. §1332(a)(3), which covers suits
between “citizens of different States and in which citizens
or subjects of a foreign state are additional parties”. That
depends on thinking of Johnson Electric as the “citizen.”
Perhaps, however, a Bermuda “limited” organization is
similar to a U.S. limited liability company, which like a
4 No. 03-2932
partnership is disregarded for purposes of determining
citizenship. Instead courts look to the citizenship of all
partners or investors. See Carden v. Arkoma Associates, 494
U.S. 185 (1990); Cosgrove v. Bartolotta, 150 F.3d 729 (7th
Cir. 1998). We directed the parties to file post-argument
briefs discussing how “limited” entities organized under
Bermuda law should be classified for purposes of the
diversity jurisdiction.
Counsel did not get the point. The parties’ joint memoran-
dum discusses such questions as whether a Bermuda
corporation is a “subject[ ] of a foreign state”—to which the
answer is yes, given Bermuda’s status as an overseas ter-
ritory of the United Kingdom, see JP Morgan Chase Bank
v. Traffic Stream (BVI) Infrastructure Limited, 536 U.S. 88(2002); Universal Reinsurance Co. v. St. Paul Fire & Marine
Insurance Co., 312 F.3d 82, 86 (2d Cir. 2002)—but not
whether Johnson Electric’s legal attributes classify it as a
“corporation.” The memorandum does not discuss Carden or
Cosgrove. But it does include a copy of Bermuda’s Compa-
nies Act 1981, so we were able to do the research ourselves.
This statute shows that a business organization “limited by
shares” under Bermuda law is equivalent in all legally
material respects to a corporation under state law. It is an
entity with perpetual existence, governed by a Board of
Directors, able to issue tradable shares (which Johnson
Electric has done; they trade on the Hong Kong Stock
Exchange), and treated as independent of its equity
investors—who are neither taxable on its profits nor liable
for its debts. Johnson Electric, rather than the investors,
therefore is a “citizen” for purposes of U.S. law, and com-
plete diversity exists.
Lear, Nevada Bond, and Johnson Electric agreed that
their transactions would be governed by Delaware law.
Delaware courts postpone adjudication about indemnity
“until there is a judgment against the party seeking it.”
No. 03-2932 5
Dana Corp. v. LTV Corp., 668 A.2d 752, 756 (Del. Ch. 1995).
That Delaware defers this kind of adjudication is not
conclusive on a federal tribunal; perhaps Delaware requires
more by way of ripeness than do federal courts. The poten-
tial for different treatment would be clear if Delaware
issued advisory opinions; then the willingness of Delaware’s
judiciary to tackle an issue would not imply that federal
courts should (or could) do likewise in diversity litigation.
Just so when the difference runs in the other direction.
Whether a dispute has reached the stage at which a
declaratory judgment under 28 U.S.C. §2201 is appropriate
is a question of federal practice. Cf. Mayer v. Gary Partners
& Co., 29 F.3d 330 (7th Cir. 1994). As it happens, though,
there is no interesting difference between federal and
Delaware approaches. We regularly say that decisions
about indemnity should be postponed until the underlying
liability has been established. See, e.g., Nationwide Insur-
ance Co. v. Zavalis, 52 F.3d 689, 693 (7th Cir. 1995) (“[T]he
duty to indemnify is not ripe for adjudication until the
insured is in fact held liable in the underlying suit.”);
Grinnell Mutual Reinsurance Co. v. Reinke, 43 F.3d 1152,
1154 (7th Cir. 1995) (“[T]he duty to indemnify is unripe
until the insured has been held liable.”); Travelers Insur-
ance Cos. v. Penda Corp., 974 F.2d 823, 833 (7th Cir. 1992)
(“[T]he determination of whether [defendant] has a duty to
indemnify is not ripe until the underlying litigation is
terminated.”)
A declaration that A must indemnify B if X comes to pass
has an advisory quality; and if the decision would not
strictly be an advisory opinion (anathema under Article III)
it could be a mistake, because it would consume judicial
time in order to produce a decision that may turn out to be
irrelevant. Declaratory decisions about indemnity differ in
this respect from the more common decision that an insurer
has a duty to defend the client in ongoing litigation.
Defense may be required even if there never turns out to be
6 No. 03-2932
any liability to indemnify; and a court that has devoted
considerable effort to determining the scope of a defense
obligation to resolve the parties’ immediate dispute may
find it prudent to specify the scope of an indemnity duty at
the same time if that subject also is in debate. Here, by
contrast, the judge found that Johnson Electric did not have
any duty to defend Lear in the Mississippi litigation, which
made it less attractive to try to wade into the parties’
debate about indemnity—and impossible for an appellate
court to say that the district judge abused her discretion by
steering clear for now.
Lear (and thus Nevada Bond) has retained any liability
attributable to “a discontinued operation . . . or assets no
longer used . . . by UTA” as of the transfer date in 1999.
According to Lear, this clause does not apply because
manufacturing is ongoing at the plant in Columbus,
Mississippi, and Johnson Electric therefore must assume
the liability. Johnson Electric reads the language differ-
ently, as distinguishing between an “operation” (and its
associated assets) and the whole plant. So if the Columbus
plant made a product that is no longer sold, and the
production line for that product led to the pollution, then
Lear and Nevada Bond retain the liability: that particular
manufacturing operation is discontinued and the assets
may have been sold off. The dispute, in other words, con-
cerns the level of generality at which to read the words
“operation” and “assets.” Do they cover whole plants, or do
they refer instead to products, production lines, or even
particular machines? It seems unlikely that by throwing
away a leaky pipe, and thus discarding one asset, Johnson
Electric could fob a substantial liability off on Nevada Bond;
that would not be a sensible reading of the contract. But it
may well be sensible to read this language as providing that
Nevada Bond retains liability for major production facilities
that were closed before the sale in 1999, even if other
facilities at the same site remain operational.
No. 03-2932 7
Determining the meaning of the words “operation” and
“assets” may require the court to learn a good deal about
the economic context of this transaction (and the businesses
in which United Technologies and Johnson Electric engage),
and perhaps to probe the bargaining history of the transac-
tions to learn whether the parties exchanged views about
this subject. The endeavor would be unnecessary if the
plaintiffs in Mississippi fail to show that the grounds are
contaminated, or if it turns out that any leaks came from
ongoing operations. Only if the Mississippi litigation ends
in liability stemming from pollution caused by production
facilities that were closed before the sale in 1999 will the
current dispute require resolution. Waiting to see the
outcome in Mississippi may be aggravating for Lear, but it
has value from the judiciary’s perspective—and that is one
permissible consideration in the declaratory-judgment
calculus. No one has a legal entitlement to declaratory or
other equitable relief in circumstances such as these.
All well and good, Lear allows, but it insists that it suffers
an unconditional loss that could be alleviated now by a
declaratory judgment: it must pay counsel to carry on the
litigation in Mississippi. That cost should be shifted to
Johnson Electric immediately, Lear submits. Yet this is just
an effort to create a defense obligation though the back
door. As the district court held, the contract gives Johnson
Electric an option but not a duty to defend Lear in any
environmental litigation. This also means that Johnson
Electric need not underwrite the ongoing costs of Lear’s
defense. Perhaps, once the Mississippi litigation is over, any
legal expenses will be deemed part of the sum covered by
the indemnity; the agreement defines “Covered Liabilities”
to include the costs and expenses of litigation. But no duty
to defend means no duty to pay for the outlays of defense on
a current basis. Payment abides the decision about indem-
nity. If Lear wants to escape these ongoing expenses, all it
8 No. 03-2932
has to do is roll over and play dead in the Mississippi
litigation. Either Nevada Bond or Johnson Electric must
pay in the end, so Lear has no real risk unless it is that one
of these parties might become unable to pay when the time
comes; and the prospect of Lear’s default might induce one
or both of these to take up the defense after all. It is to
guard against such an eventuality, which might lead to a
default judgment that one or the other would be compelled
to pay, that the contract creates an option to displace Lear
and take over the litigation. Nevada Bond and Johnson
Electric already are parties in Mississippi, so they might
quickly pick up the torch if Lear should choose to lay it
down. By volunteering an unnecessary defense in Missis-
sippi, Lear cannot compel a federal court in Chicago to
undertake a premature adjudication about indemnity.
AFFIRMED
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—12-30-03