Scottsdale Insurance Company v. City Of Waukegan et al

Filing 43

MEMORANDUM Opinion and Order Signed by the Honorable Andrea R. Wood on 7/21/2014: Mailed notice. (is, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
SCOTTSDALE INSURANCE COMPANY,
Plaintiff,
v.
CITY OF WAUKEGAN, MICHAEL
URBANCIC, WILLIAM BIANG, PHIL
STEVENSON, MIGUEL JUAREZ, DAVID
DEPREZ, and BENNY STARKS,
Defendants.

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No. 13-cv-03088
Judge Andrea R. Wood

MEMORANDUM OPINION AND ORDER
Plaintiff Scottsdale Insurance Group (“Scottsdale”) has filed suit against the City of
Waukegan (“Waukegan”), Michael Urbancic, William Biang, Phil Stevenson, Miguel Juarez,
David Deprez (collectively, the “Individual Defendants” and, along with Waukegan, the
“Waukegan Insureds”), and Benny Starks. Scottsdale seeks a declaratory judgment that it owes
no obligation under certain law enforcement liability insurance policies with respect to the
Waukegan Insureds’ potential liability in a pending civil rights lawsuit filed by Starks in the
Northern District of Illinois (the “Starks Suit” or “underlying litigation”). Currently before the
Court is the Waukegan Insureds’ motion to dismiss Counts III through VII of Scottsdale’s
Amended Complaint for Declaratory Judgment (“Amended Complaint”) pursuant to Federal
Rule of Civil Procedure 12(b)(6) (the “Motion”). (Dkt. No. 25.) As explained below, because
adjudicating Counts III through VII would require this Court impermissibly to determine
ultimate facts in controversy that could bind the parties in the underlying litigation, the Motion is
granted.

BACKGROUND
In 1986, Starks was arrested, charged, and convicted of a sexual assault. (Am. Compl.
¶ 17, Dkt. No. 20.) Twenty years into his sixty-year sentence, newly-surfaced DNA evidence led
to the reversal of Starks’s conviction. (Id.) Starks subsequently filed the underlying litigation
against the Waukegan Insureds, alleging, among other things, that they caused his wrongful
charging, prosecution, and conviction by falsifying or improperly altering evidence, by
suppressing and destroying exculpatory evidence, and by giving false testimony. (Id. ¶ 22.)
Starks seeks compensatory and punitive damages, costs, and attorneys’ fees from the Waukegan
Insureds. (Id.) As of the date of this Order, the Starks Suit is still in the discovery stage, and a
three-week trial is set for August 2015. See Starks v. City of Waukegan, et al., Case No. 1:09-cv00348 (N.D. Ill.) at Dkt. Nos. 226, 252. 1 There have been no factual determinations made in the
Starks Suit.
Shortly after Starks filed the underlying litigation, the Waukegan Insureds tendered their
defense to Scottsdale, which had issued to Waukegan four policies for law enforcement liability
insurance effective from November 1, 1987 until November 1, 1991 (the “LEL Policies”). (Am.
Compl. ¶¶ 14, 18, Dkt. No. 20.) Scottsdale agreed to participate in the defense of the Waukegan
Insureds pursuant to a reservation of rights, expressly reserving its right to deny coverage and
withdraw from the defense of the Starks Suit. (Id. ¶ 19.) On April 24, 2013, Scottsdale instituted
the current lawsuit pursuant to the Federal Declaratory Judgment Act, 28 U.S.C. § 2201. (Dkt.
No. 1.) Scottsdale later filed the Amended Complaint (Dkt. No. 20), in which it seeks the
following declarations:
1

The Court takes judicial notice of the docket of the Starks Suit. See Geinosky v. City of Chicago, 675
F.3d 743, 745 n.1 (7th Cir. 2012) (in determining a 12(b)(6) motion, a court may refer to information that
is subject to proper judicial notice); Barrow v. City of Chicago, No. 13-cv- 8779, 2014 WL 1612712, at
*3 n.2 (N.D. Ill. Apr. 21, 2014) (court dockets are properly subject to judicial notice in deciding a motion
under Rule 12(b)(6)).

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•

No duty to defend the Waukegan Insureds in the Starks Suit exists under any of the
LEL Policies (Count I);

•

The Starks Suit does not trigger coverage because the allegations do not fall within
the effective policy periods of the LEL Policies (Count II);

•

The allegations in the Starks Suit state intentional acts undertaken with the intent to
cause harm and are therefore not covered by any of the LEL Policies (Count III);

•

The allegations in the Starks Suit concern acts committed by the Individual
Defendants outside the scope of their duties as employees and, therefore, no coverage
exists under the LEL Policies for the Individual Defendants (Count IV);

•

The allegations in the Starks Suit contend that the Waukegan Insureds intended,
expected, or reasonably could have expected the injury alleged and, therefore, no
coverage exists under the LEL Policies (Count V);

•

The allegations in the Starks Suit state criminal, malicious, fraudulent, or dishonest
acts for which no coverage exists under the LEL Policies (Count VI); and

•

There is no coverage under the LEL Policies for any punitive or exemplary damages
claimed in the Starks Suit (Count VII).

The Waukegan Defendants filed an answer to Counts I and II (Dkt. No. 24), but moved to
dismiss Counts III through VII (Dkt. No. 25). 2

2

The Waukegan Insureds did not move to dismiss Counts I and II of the Amended Complaint, which are
the counts that implicate the insured’s duty to defend. Yet Scottsdale spends much of its response brief
addressing that very topic. As the duty to defend was not raised in the Motion, it is not properly before the
Court. Nonetheless, the Court notes that under Illinois law, “once the duty to defend is found to exist with
respect to one or some of the theories of recovery advanced in the underlying litigation, the insurer must
defend the insured with regard to the remaining theories of recovery as well.” Nat’l. Union Fire Ins. Co.
of Pittsburgh, Pa. v. Glenview Park Dist., et al., 632 N.E.2d 1039, 1042-43 (Ill. 1994).

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DISCUSSION
“A motion under Rule 12(b)(6) tests whether the complaint states a claim on which relief
may be granted.” Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir. 2012). Under Rule 8(a)(2), a
complaint must include “a short and plain statement of the claim showing that the pleader is
entitled to relief.” Fed. R. Civ. P. 8(a)(2). The complaint must “plead[ ] factual content that
allows the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The “[f]actual allegations must be enough
to raise a right to relief above the speculative level.” Bell Atl. v. Twombly, 550 U.S. 544, 555
(2007). The Court construes a complaint in the light most favorable to the plaintiff and accepts
all well-pled facts as true. Justice v. Town of Cicero, 577 F.3d 768, 771 (7th Cir. 2009).
Under Illinois law, 3 the so-called Peppers doctrine provides that “it is generally
inappropriate for a court considering a declaratory judgment action to decide issues of ultimate
fact that could bind the parties to the underlying litigation.” Allstate Ins. Co. v. Kovar, 842
N.E.2d 1268, 1275 (2d Dist. 2006) (citing Maryland Cas. Co. v. Peppers, 355 N.E. 2d 24, 30 (Ill.
1976)). In Maryland Casualty Co. v. Peppers, the Illinois Supreme Court found that the trial
court in an insurance coverage case had abused its discretion when it found that the insured (the
defendant in an underlying personal injury action) had intentionally caused injury to the plaintiff
in the underlying litigation. 355 N.E. 2d at 29-30. The Illinois Supreme Court held that this issue
was one of the “ultimate facts upon which recovery is predicated in the [underlying] personal
injury action against [the defendant], which had been filed considerably before the declaratory
judgment action had been instituted.” Id. at 30. The court reasoned that such a determination
regarding the declaratory judgment action was “premature,” and that the collateral estoppel
3

The parties agree that the substantive law of the State of Illinois law applies. (Mot. to Dismiss at 3, Dkt.
No. 25; Pl’s Resp. at 3, Dkt. No. 28.)

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effect of any factual determinations in the declaratory judgment action would interfere with the
adjudication of the underlying action. Id. Thus, in insurance coverage litigation, the Peppers
doctrine “specifically precludes determination of any ultimate facts upon which liability or
recovery might be predicated in the underlying case.” Landmark Am. Ins. Co. v. NIP Grp., Inc.,
962 N.E.2d 562, 579 (1st Dist. 2011).
In order to adjudicate any of Counts III through VII, the Court would be required to make
impermissible factual determinations upon which liability could be predicated in the Starks Suit.
For example, to adjudicate Count IV of the Amended Complaint, the Court would have to
establish whether the Individual Defendants committed actions that were “outside the scope of
their duties as employees.” (Am. Compl. ¶ 32, Dkt. No. 20.) Put another way, the Court would
have to determine the facts regarding what actions were taken by the Individual Defendants,
establish the limits to the scope of the Individual Defendants’ employment, and resolve whether
the actions at issue fell beyond that scope. Similarly, to resolve Count III, the Court would have
to determine whether any of the Waukegan Insureds engaged in “intentional acts undertaken
with the intent to cause harm” (id. ¶ 31); Count V would require that the Court determine
whether the Waukegan Insureds “intended, expected, or reasonably could have expected the
injury alleged” (id. ¶ 35); Count VI would require the Court to adjudicate whether any of the
Waukegan Insureds had engaged in “criminal, malicious, fraudulent, or dishonest acts” (id. ¶¶
37-38); and Count VII would require the Court to decide whether “punitive or exemplary
damages” are covered by the Scottsdale LEL Policies, prior to such damages being levied in the
Starks Suit (id. ¶¶ 40-41). Any of these facts could serve as predicates for the liability of the
Waukegan Insureds in the Starks Suit. Thus, it would be improper under the Peppers doctrine for
the Court to determine them in this declaratory action.

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Furthermore, the Court declines to stay Counts III through VII pending final resolution of
the Starks Suit. A district court may stay or dismiss an action seeking a declaratory judgment
pursuant to 28 U.S.C. § 2201(a) in “the sound exercise of its discretion.” Wilton v. Sevens Falls
Co., 515 U.S. 277, 288 (1995); see also Sta–Rite Indus., Inc. v. Allstate Ins. Co., 96 F.3d 281,
287 (7th Cir. 1996). The Starks Suit is currently set for trial in August 2015; thus, a final
determination of liability is not due to occur for over one year from the date of this Order. Posttrial motions and potential appeals may add months—if not years—to that time period. And
when all is finally said and done in the underlying litigation, it is possible that some or all of the
claims considered in this Order will no longer be in controversy. Because a final determination
of the Waukegan Insureds’ liability in the Starks Suit is a distant prospect and may render
irrelevant certain claims brought by Scottsdale, the Court dismisses Counts III through VII of the
Amended Complaint without prejudice. See Scottsdale Ins. Co. v. Vill. of Dixmore et al., No. 13cv-6392, 2014 WL 1379888, at *3 (N.D. Ill. Apr. 8, 2014).
CONCLUSION
For the foregoing reasons, the Waukegan Insureds’ Motion is granted. Counts III, IV, V,
VI, and VII of the Amended Complaint are dismissed without prejudice to Plaintiff refiling those
claims as appropriate after final disposition of the case Starks v. City of Waukegan, et al., No. 09CV-00348 (N.D. Ill.).
ENTERED:

Dated: July 21, 2014

__________________________
Andrea R. Wood
United States District Judge

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