American Patriot Ins v. Mutual Risk Mgmt

In the
United States Court of Appeals
For the Seventh Circuit
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No. 03-1684
AMERICAN PATRIOT INSURANCE AGENCY, INC., et al.,
Plaintiffs-Appellants,
v.
MUTUAL RISK MANAGEMENT, LTD., et al.,
Defendants-Appellees.
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Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 02 C 2728—Ruben Castillo, Judge.
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ARGUED OCTOBER 31, 2003—DECIDED APRIL 16, 2004
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Before POSNER, EASTERBROOK, and EVANS, Circuit Judges.
POSNER, Circuit Judge. The district judge dismissed
this diversity suit, after several months of discovery and
fruitless settlement negotiations, on the basis of a forum-
selection clause that designated Bermuda as the place for
litigating any dispute concerning a contract between the
plaintiffs and the Mutual defendants, a group of affiliated
corporations. Another defendant, Cunningham-Lindsey,
Inc., is unaffiliated; we discuss its appeal at the end of this
opinion. The plaintiff’s challenge to the dismissal of the
2 No. 03-1684
Mutual defendants presents questions primarily of waiver
of venue and the scope of the forum-selection clause.
American Patriot Insurance Agency, the principal plaintiff
and the only one we need discuss, specializes in selling
liability insurance to roofing contractors. Two Mutual
affiliates that are not parties to the litigation issued insur-
ance policies to the plaintiff’s customers, with the plaintiff
acting as agent, while Mutual Indemnity, one of the Mutual
companies that is a party, reinsured those policies. The
relations between the plaintiff and the Mutual group of
companies were spelled out in a series of contracts. The
principal one was a “Shareholder Agreement” between the
plaintiff and Mutual Holdings, another Mutual affiliate that
is not a defendant, whereby the plaintiff received its share
of the income generated by the insurance program in the
form of a dividend payment on preferred stock in Mutual
Holdings purchased by the plaintiff. The Agreement states
that it “shall be exclusively governed by and construed in
accordance with the laws of Bermuda and any dispute
concerning this Agreement shall be resolved exclusively by
the courts of Bermuda.”
According to the complaint, which is the only source of
facts, the insurance program went into effect but produced
large losses for the plaintiff. An employee of one of the
Mutual defendants persuaded the plaintiff to buy additional
reinsurance from Mutual Indemnity. The purchase agree-
ment states that “formal acknowledgment of this revision to
the Program will be contained in the revisions of the
Shareholder Agreement.” The plaintiff continued to lose
money and finally brought this suit, charging that the
Mutual defendants had committed breaches of contract and
had fraudulently induced the plaintiff to post letters
of credit to secure its obligations under the Shareholder
Agreement. There are additional charges against the Mutual
defendants but they need not be discussed.
No. 03-1684 3
The suit was filed in April of 2002, but on joint motion of
the parties proceedings were stayed while they discussed
settlement and engaged in informal discovery. In December,
the Mutual defendants began bankruptcy proceedings in
Bermuda and the following month filed a motion in the
present suit, under Fed. R. Civ. P. 12(b)(3), which the district
judge granted, to dismiss the suit for improper venue, citing
the forum-selection clause. The plaintiff argues that the
defendants’ nine-month delay in moving for dismissal
operated to waive or forfeit their objection to the Chicago
venue. The plaintiff interprets Rule 12(h)(1) to require a
defendant to interpose an objection to venue at the earliest
possible opportunity and notes several cases that contain
language supportive of its position, notably our decision in
Frietsch v. Refco, Inc., 56 F.3d 825, 830-31 (7th Cir. 1995).
In a system of case law there is a tendency, as we noted
the other day in Peaceable Planet, Inc. v. Ty, Inc., No. 03-3452,
2004 WL 692166, at *3 (7th Cir. Apr. 2, 2004), for a drift
away from the language of a statute or a rule, with cases
increasingly quoting previous cases rather than returning to
the language and purpose of the provision underlying the
judge-built superstructure. Sometimes there are compelling
reasons for such a drift but often it is due just to imprecision
of paraphrase. Rule 12(h)(1) of the civil rules requires that
two of the multitudinous defenses to a suit that a defendant
might plead—lack of personal jurisdiction by virtue of
defective service of process or otherwise, and improper
venue—be pleaded earlier than any of the others. These
defenses are strictly for the convenience of the defendant; he
doesn’t have to engage in discovery to know whether the
forum chosen by the plaintiff is a convenient one; and so
there is no reason to allow him to lie back, wait until the
plaintiff has invested resources in preparing for suit in the
plaintiff’s chosen forum, wait perhaps to assess his pros-
pects in that forum, and only then demand that the case
4 No. 03-1684
start over elsewhere. Rice v. Nova Biomedical Corp., 38 F.3d
909, 914 (7th Cir. 1994); Flory v. United States, 79 F.3d 24, 25
(5th Cir. 1996); Schneider v. National R.R. Passenger Corp., 72
F.3d 17, 20 (2d Cir. 1995) (per curiam); Manchester Knitted
Fashions, Inc. v. Amalgamated Cotton Garment & Allied
Industries Fund, 967 F.2d 688, 691-92 (1st Cir. 1992).
So improper venue must be pleaded early, but not at the
earliest possible opportunity. At least that is not what the
rule says. It says that an objection to venue is waived if
“neither made by motion under this rule nor included in a
responsive pleading” (or in an amendment to such a plead-
ing that a party can make without the court’s permission).
The defendant can move as early as he wants but he is not
required to file a motion. He has a right to wait until he files
his answer. Thus he needn’t object at the earliest possible
opportunity, which might be five minutes after receiving a
copy of the complaint.
But a right can be waived or forfeited. If the defendant
tells the plaintiff that he is content with the venue of the
suit, or by words or actions misleads the plaintiff into
thinking this or the court into becoming involved in the case
so that there would be wasted judicial effort were the case
to be dismissed to another forum, or if he stalls in pleading
improper venue because he wants to find out which way the
wind is blowing, then conventional principles of waiver or
equitable estoppel come into play and if invoked by the
plaintiff block the challenge to venue. Neirbo Co. v. Bethlehem
Shipbuilding Corp., 308 U.S. 165, 167-68 (1939); Continental
Bank, N.A. v. Meyer, 10 F.3d 1293, 1296-97 (7th Cir. 1993); cf.
Trustees of Central Laborers’ Welfare Fund v. Lowery, 924 F.2d
731, 732-33 (7th Cir. 1991) (per curiam); Yeldell v. Tutt, 913
F.2d 533, 538-39 (8th Cir. 1990).
The district judge, though he said that the Mutual de-
fendants had maneuvered to delay the dismissal of the suit
No. 03-1684 5
while they prepared their bankruptcy filing in Bermuda
so that they could funnel all their legal disputes into a
Bermuda court, found no waiver or estoppel. Actually, he
was mistaken to suspect the defendants of behaving de-
viously. Had they wanted to funnel the suit to Bermuda all
they would have had to do was move under Rule 12(h)(1);
they had no motive to delay the motion if their overriding
desire was to consolidate all their legal troubles in a friendly
forum. And anyway the plaintiff well knew that there was
going to be a bankruptcy proceeding in Bermuda.
What is true is that by conducting settlement discussions
and responding to discovery requests in Chicago, the
Mutual defendants—which are represented by a Chicago
law firm—demonstrated a certain comfort with negotiating,
and engaging in some very preliminary pretrial litigation
activity, in Chicago. But the plaintiff would have been
unreasonable to infer from this that the defendants would
not plead improper venue, given the forum-selection clause
and the fact that they are all citizens or residents either of
Bermuda or Pennsylvania, rather than of Illinois. Nor was
the plaintiff put to any inconvenience by the delay in the
filing of the defendants’ motion to dismiss. Nor were they
testing the wind, for the district court made no rulings until
it dismissed the suit; and by the same token the delay in
pleading improper venue caused no wasted motion by the
court. Furthermore, considerations of economy argue
against the filing of any motions while parties are trying to
reach a settlement, since if they do settle the case any
motions filed in it will be moot.
So the motion to dismiss for improper venue was not
improperly delayed, and we must decide whether it was
properly granted on the basis of the forum-selection clause.
The plaintiff argues that its disputes with the Mutual
defendants (and with Cunningham-Lindsey as well, but that
6 No. 03-1684
is for later) concern other contracts, which are part of the
overall insurance program but do not contain forum-
selection clauses, rather than the Shareholder Agreement;
that they are not purely contractual disputes, because fraud
is also charged; and that none of the Mutual defendants was
actually a party to the Shareholder Agreement—
for remember it was between the plaintiff and Mutual
Holdings, which is not a defendant. These are really the
same argument, and amount to saying that a plaintiff can
defeat a forum-selection clause by its choice of provisions to
sue on, of legal theories to press, and of defendants to name
in the suit. If this were true, such clauses would be empty.
It is not true. Terra Int’l, Inc. v. Mississippi Chemical Corp., 119
F.3d 688, 693-95 (8th Cir. 1997); Lambert v. Kysar, 983 F.2d
1110, 1121-22 (1st Cir. 1993); Coastal Steel Corp. v. Tilghman
Wheelabrator Ltd., 709 F.2d 190, 203 (3d Cir. 1983), overruled
on other grounds, Lauro Lines v. Chasser, 490 U.S. 495 (1989).
The contracts, including the Shareholder Agreement, are a
package. The Shareholder Agreement happens to be the
only site of the forum-selection clause, but no reason has
been suggested for why the parties would have wanted
disputes under that agreement to be litigated in Bermuda
but not disputes under the other pieces of the jigsaw puzzle.
The Mutual defendants that are the signatories of the other
contracts with the plaintiff are all affiliates of Mutual
Holdings, the signatory of the Shareholder Agreement; all
worked together to create and administer the insurance
program; and disputes arising under the other contracts
therefore “concern” the Shareholder Agreement.
As for the fact that the defendants are charged with fraud
rather than breach of contract, this can get the plaintiff
nowhere in its efforts to get out from under the forum-
selection clause. Not only does the clause refer to disputes
concerning the contractual relationship between the parties,
No. 03-1684 7
however those disputes are characterized. More important,
a dispute over a contract does not cease to be such merely
because instead of charging breach of contract the plaintiff
charges a fraudulent breach, or fraudulent inducement, or
fraudulent performance. Sphere Drake Ins. Ltd. v. All Ameri-
can Ins. Co., 256 F.3d 587, 590 (7th Cir. 2001); Roby v. Corpora-
tion of Lloyd’s, 996 F.2d 1353, 1360-61 (2d Cir. 1993); Lambert
v. Kysar, supra, 983 F.2d at 1121-22; Coastal Steel Corp. v.
Tilghman Wheelabrator Ltd., supra, 709 F.2d at 203. The reason
is not that contract remedies always supersede fraud
remedies in a case that arises out of a contract; sometimes
they do, sometimes they don’t. Compare All-Tech Telecom,
Inc. v. Amway Corp., 174 F.3d 862, 865-67 (7th Cir. 1999),
with Western Industries, Inc. v. Newcor Canada Ltd., 739 F.2d
1198, 1206 (7th Cir. 1984). It is that the existence of multiple
remedies for wrongs arising out of a contractual relation-
ship does not obliterate the contractual setting, does not
make the dispute any less one arising under or out of or
concerning the contract, and does not point to a better
forum for adjudicating the parties’ dispute than the one they
had selected to resolve their contractual disputes.
Nor is a forum-selection clause to be defeated by suing an
affiliate or affiliates of the party to the contract in which the
clause appears, or employees of the affiliates. Frietsch
v. Refco, Inc., supra, 56 F.3d at 827-28; Hugel v. Corporation
of Lloyd’s, 999 F.2d 206, 209-10 (7th Cir. 1993); Roby v.
Corporation of Lloyd’s, supra, 996 F.2d at 1358-60. And as
for the plaintiff’s argument that the word “concerning” in
the Shareholder Agreement’s forum-selection clause is nar-
rower than the more common term “arising out of,” this
is semantic quibbling. See id. at 1361; cf. National R.R.
Passenger Corp. v. Boston & Maine Corp., 850 F.2d 756, 762
(D.C. Cir. 1988).
But now we must consider the anomalous status of
Cunningham-Lindsey, which had been hired by the Mutual
8 No. 03-1684
affiliate that issued the insurance policies to the plaintiff’s
customers to administer claims under the policies.
Cunningham-Lindsey’s contract with the affiliate specified
that Texas law would govern any dispute arising under it
and that such disputes would be submitted to binding
arbitration. The plaintiff contends that Cunningham-
Lindsey administered the claims incompetently, to the
injury of the plaintiff, which claims to be a third-party
beneficiary. Cunningham-Lindsey is not affiliated with the
Mutual defendants and cannot be thought a party to the
forum-selection clause and therefore entitled to invoke it—
and anyway it never objected to venue. Acknowledging the
district judge’s error in dismissing it for improper venue,
Cunningham-Lindsey asks us to affirm its dismissal on the
grounds that it was not a party to any contract with the
plaintiff, that any dispute it might have with the plaintiff
would be governed by Texas law, which is reticent about
conferring third-party beneficiary status, and that if the
plaintiff is a third-party beneficiary of Cunningham-
Lindsey’s contract with the Mutual defendants, then any
dispute concerning that contract would have to be referred
to arbitration because the contract, as we have noted,
provides for arbitration of any disputes arising under it.
Insofar as the plaintiff’s third-party beneficiary claim is
concerned, the plaintiff is indeed bound by the choice of law
and arbitration clauses in the contract. American United
Logistics, Inc. v. Catellus Development Corp., 319 F.3d 921, 930-
31 (7th Cir. 2003); Industrial Electronics Corp. of Wisconsin v.
iPower Distribution Group, Inc., 215 F.3d 677, 680 (7th Cir.
2000); Fleetwood Enterprises, Inc. v. Gaskamp, 280 F.3d 1069,
1075-77 (5th Cir. 2002); E.I. DuPont de Nemours & Co. v.
Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d
187, 195 (3d Cir. 2001). But the fact that a contract specifies
arbitration as the mode of resolving disputes arising under
it is not a ground for dismissing a suit for breach of the
No. 03-1684 9
contract. Rather it is a ground for an order to arbitrate,
which Cunningham-Lindsey has not sought, doubtless
because it doesn’t think that the plaintiff is a third-party
beneficiary of the contract under Texas law. Whether it is or
not is an issue that remains for consideration by the district
court, along with a tort claim that the plaintiff also makes
against Cunningham-Lindsey. If the court finds that the
plaintiff is a third-party beneficiary, it will then have to
determine whether Cunningham-Lindsey can still demand
arbitration and, if so, whether the plaintiff’s tort claim
would be encompassed within such a demand.
The dismissal of Cunningham-Lindsey as a defendant is
reversed and the case against it remanded, but in all other
respects the district court’s decision is affirmed.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—4-16-04