Scottsdale Insurance Company v. Knapp et al
MEMORANDUM OPINION AND ORDER signed by the Honorable Matthew F. Kennelly on 7/22/2013: Defendants' motion to dismiss 16 is denied for the reasons stated in this decision. (mk)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
SCOTTSDALE INSURANCE CO.,
MOYENDA M. KNAPP,
JUANITA B. RODRIGUEZ,
and JOHNSON & BELL, LTD.,
No. 13 C 988
MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
Scottsdale Insurance Company (Scottsdale), as subrogee of the City of Markham
(Markham), has filed suit against attorneys Moyenda Knapp and Juanita Rodriguez and
their law firm, Johnson & Bell, Ltd., for legal malpractice in connection with their
representation of Markham in defense of a malicious prosecution lawsuit. Scottsdale
seeks reimbursement from defendants of the amounts it paid to satisfy an adverse
judgment in the case. Defendants have moved to dismiss under Federal Rule of Civil
Procedure 12(b)(7) on the ground that Markham is a necessary party that Scottsdale
has failed to join. For the reasons stated below, the Court denies defendants’ motion.
In 2008, Terrance White, a Markham police officer, filed suit against Markham for
malicious prosecution. Upon being served with summons in the White case, Markham
tendered the defense of the case to Scottsdale pursuant to a liability insurance policy
that it had purchased from Scottsdale. Markham sought indemnification and a defense
in the White case. Scottsdale denied coverage on May 16, 2008 and provided neither
defense nor indemnification in the action.
Markham later retained Johnson & Bell to defend it in the White case. On
October 13, 2010, Markham again requested that Scottsdale provide it with a defense
and indemnification in the case. Scottsdale again declined coverage on October 20,
The White case went to trial on February 7, 2011. On February 15, 2011, a jury
returned a $2,253,273 verdict in favor of White. Markham’s insurance coverage
counsel made yet another demand on Scottsdale to accept the defense of the White
case, on March 16, 2011. On April 15, 2011, Johnson & Bell filed a post-trial motion
seeking judgment notwithstanding the verdict or, in the alternative, a new trial.
On April 19, 2011, Scottsdale reversed its previous decisions and agreed to
defend and indemnify Markham in the White case. Scottsdale terminated Johnson &
Bell and retained counsel of its choice to represent Markham for the remainder of the
proceedings in the case. After the retention of the new counsel, Scottsdale agreed to
settle the case for $1.7 million.
Scottsdale, as subrogee of Markham, has now filed a legal malpractice claim
against defendants. Scottsdale claims that before it accepted coverage in the matter,
defendants were negligent in their representation of Markham. Scottsdale seeks to
recover the sum it paid to settle the case.
Defendants contend that Scottsdale’s lawsuit should be dismissed because
Scottsdale has failed to join a necessary party. They contend that because Markham
paid a deductible under the insurance policy, it owns a portion of the malpractice claim
and is therefore a necessary party to the action. Defendants also contend that
Scottsdale was a complete stranger to the attorney-client relationship and that allowing
the insurer to prosecute the case without joining Markham as a party would prejudice
both Markham and Johnson and Bell. Defendants argue that in a standard legal
malpractice action, the suing client is deemed to have waived the attorney-client
privilege. Because Scottsdale was never the law firm’s client, defendants contend, the
privilege will remain intact, and they will not be able to introduce communications they
had with their client (Markham) in order to defend against Scottsdale’s lawsuit.
Defendants also contend that Markham may be prejudiced by the potentially preclusive
effect of a judgment against Scottsdale. In addition, defendants argue that Markham
owns a portion of the malpractice claim due to its payment of the deductible, and thus
proceeding in Markham’s absence may result in multiple malpractice lawsuits against
defendants. On a more basic level, defendants contend – albeit only in a footnote in
their opening brief, though more fully in their reply brief – that Scottsdale was a
“volunteer” in paying the settlement and thus is not entitled to subrogation.
Scottsdale contends that Markham is not a necessary party to the action. It
argues that it is fully subrogated to the loss that it has sued to recover. Although
conceding that Markham paid a deductible, Scottsdale contends that this amount was
incurred in paying for Markham’s defense and was unrelated to Scottsdale’s obligation
to indemnify Markham. Scottsdale states that in this case, it seeks to recover only the
amount that it paid in settlement of the case, and not any of the amount paid for the
defense of the White case. Scottsdale also contends that because, as equitable
subrogee, it steps into Markham’s shoes, defendants will be able to offer privileged
communications with Markham to defend against Scottsdale’s claim just as they could if
Markham had sued. Finally, Scottsdale notes that Markham has ratified Scottsdale’s
action in filing this suit, and it contends that there is no basis to believe that Markham
has any intention of bringing its own suit against defendants.
Defendants have filed their motion pursuant to Federal Rule of Civil Procedure
12(b)(7), which provides that a defendant may move to dismiss a claim based on the
failure to join a party under Rule 19. A party that meets the requirements of Federal
Rule of Civil Procedure 19(a) must be joined if feasible. If joinder is not feasible, then
the Court must determine, applying the criteria of Rule 19(b), whether the action can
proceed in the party’s absence.
Defendants cite Wadsworth v. U.S. Postal Service, 511 F. 2d 64, 65-66 (7th Cir.
1975), for the proposition that “if the party whose joinder is sought is a ‘real party in
interest’ pursuant to Federal Rule of Civil Procedure 17(a), that party is to be considered
as being a necessary party for purposes of joinder without having to meet the
requirements of Rule 19(a).” Assuming that is a correct reading of Wadsworth,1 it does
not help defendants. Scottsdale has expressly confined its claim to recovery of the
amount it paid to indemnify Markham in the White case. Markham, which paid none of
that money, is not the real party in interest regarding this claim.
More particularly, the question of whether Markham is a real party in interest
Based on the court’s citation in Wadsworth of United States v. Aetna Cas. & Sur. Co., 388 U.S.
366 (1949), it appears to this Court that Wadsworth simply says that in an action by an insurer
to recover amounts it paid on a claim, if the insurer did not pay the entire claim, the insured and
any other insurers that paid on the claim must be joined as plaintiffs. See id. at 380-81.
turns on whether Scottsdale is partially or fully subrogated to the claim that it asserts.
See State Farm Fire & Cas. Co. v. Electrolux Home Products, Inc., No. 11 C 8946, 2012
WL 1287698, at *1-3 (N.D. Ill. Apr. 16, 2012). Generally speaking, if a deductible was
paid, then under Illinois law, both the insurer and the deductible-paying insured own a
portion of a claim that involves reimbursement. See In re The Chicago Flood, No. 93 C
1214, 1993 WL 116756, at *1 (N.D. Ill. Apr. 15, 1993). In the present case, Markham
paid a $50,000 deductible, but it appears that it did so in in connection with defense
costs, not to pay or settle the judgment that White obtained. See Defs.’ Mot. to Dismiss,
Ex. 2 (Knapp Affidavit) ¶ 9. For that reason, Markham does not own a portion of the
current claim that Scottsdale is asserting in this case, and thus Markham not a real
party in interest under Rule 17. Cf. State Farm Fire & Cas. Co., 2012 WL 1287698, at
*2 (indicating that where the insurer is not asking to recover the deductible, the party or
parties that paid the deductible need not be joined).
Having concluded that Markham is not a real party in interest under Rule 17, the
Court turns to whether Markham is a necessary party under Rule 19(a). Under Rule 19
(a), a party must be joined if feasible – in other words, it is a “necessary” party – if: (1)
complete relief among the existing parties cannot be accorded without that party’s
presence; (2) the ability of the absent party to protect its interests would be impaired by
its absence from the litigation; and (3) existing parties would be subjected to multiple or
inconsistent obligations if joinder is not required. See Thomas v. United States, 189
F.3d 662, 667 (7th Cir. 1999).
The first element of Rule 19(a) is not satisfied in this case. That portion of the
rule, Rule 19(a)(1)(A), refers to the absence of complete relief “among the parties to the
lawsuit.” Thomas, 189 F.3d at 667. As the Court has stated, Scottsdale has sued to
recover only the amount it paid to settle the White case, in other words, the amount it
paid for purposes of indemnifying Markham. Markham has no interest in recovering the
amount paid to settle the claim, because it did not pay any part of the settlement. Thus
the Court can accord in this lawsuit complete relief between Scottsdale and defendants.
Defendants have also failed to show that their ability to protect their interests
would be impaired by Markham’s absence from the litigation. See Fed. R. Civ. P.
16(a)(1)(B). As an equitable subrogee, Scottsdale stands in the shoes of Markham,
defendants’ client. Thus defendants are authorized by Illinois Rule of Professional
Conduct 1.6(b)(5) to disclose otherwise privileged information to defend themselves
against Scottsdale’s claims. That rule does not limit authorized disclosure of privileged
information to actions between the attorney and client; it expressly authorizes an
attorney to disclose privileged information “to respond to allegations in any proceeding
concerning the lawyer’s representation of the client.” Id. That certainly encompasses
this case. Finally, even if that Rule did not exist, Markham’s city attorney has, by
affidavit, expressly waived the city’s privilege for purposes of this litigation. See Pl.’s
Resp. to Defs.’ Mot. to Dismiss (Miller Affidavit), Ex. A ¶ 11. In short, defendants’
contention that they will be prejudiced unless Markham is joined as a party lacks merit.
Finally, there is no basis to believe that the defendants would be subjected to
multiple or inconsistent obligations if Markham is not joined as a plaintiff. See Fed. R.
Civ. P. 19(a)(1)(C). Defendants raise the possibility that Markham could sue them for
malpractice. But “[h]ypothetical proceedings . . . are not sufficient to establish a
potential for multiple or otherwise inconsistent liabilities . . . . “ Rotec Indus., Inc. v.
Aecon Grp., Inc., 436 F. Supp. 2d 931, 938 (N.D. Ill. 2006). “When [an] outsider is
aware of an action and does not claim such an interest, courts typically do not secondguess the decision.” Id. at 937. In this case there is no indication that Markham intends
to proceed with its own claim of legal malpractice. In fact, Markham has ratified the
actions of Scottsdale in suing defendants. See Pl.’s Resp. to Defs.’ Mot. to Dismiss, Ex.
A ¶ 12. The Court notes, in this regard, that the odds are fairly strong that at this point,
any claim by Markham would be barred by the two-year statute of limitations that
applies to legal malpractice claims in Illinois, seeing as how the judgment against
Markham – the typical accrual date for a legal malpractice claim – was entered on
February 6, 2011. See Praxair, Inc. v. Hinshaw & Culbertson, 235 F.3d 1028, 1031-32
(7th Cir. 2000); 735 ILCS 5/13-214.3(b).
Because defendants have not shown that Markham is a necessary party within
the meaning of Rule 19(a), there is no need for the Court to address the provisions of
In their reply brief, defendants argue that Scottsdale is a “volunteer” in payment
and thus is not entitled to equitable subrogation. This argument is forfeited for purposes
of the motion to dismiss, because defendants did not assert it in their opening brief –
except, arguably, by way of a relatively cryptic footnote that cites no authority, which did
not develop the argument sufficiently to require its consideration. See Defs.’ Mot. to
Dismiss at 7 n.2. See Parker v. Franklin Cnty. Cmty. Sch. Corp., 667 F.3d 910, 924
(7th Cir. 2012) (undeveloped argument in footnote is forfeited). Defendants did flesh
out this argument somewhat in their reply brief. See Defs.’ Reply at 2-3. Even then,
however, they cited no legal authority supporting their contention. In any event, an
argument that was available to a party when it filed its initial brief but that it did not make
or develop until its later-filed reply is considered forfeited. See, e.g., Carter v. Tennant
Co., 383 F.3d 673, 679 (7th Cir. 2004). In short, the Court concludes that defendants
forfeited this contention for purposes of the present motion to dismiss.
For the reasons stated above, the Court denies defendants’ motion to dismiss
[docket no. 16].
MATTHEW F. KENNELLY
United States District Judge
Date: July 22, 2013
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