Opinion
No. 99 C 7466.
March 4, 2002
ORDER
Plaintiff Nancy Flodine asked her business liability insurer, defendant State Farm Fire and Casualty Company ("State Farm"), to defend her in a lawsuit brought by J.C. Penney Company ("Penney"). When State Farm refused, Flodine filed this action seeking a declaration that her insurance policy covered Penney's claims against her and that State Farm owed her duties of defense and indemnity with respect to the Penney litigation. On cross-motions for judgment on the pleadings, this court held that State Farm had a duty to defend Flodine in the Penney litigation. Pending is State Farm's subsequent motion for leave to file a counter-complaint. For the reasons set forth below, the motion is granted in part and denied in part.
I. Background
Plaintiff Flodine manufactured and sold "Southwestern-style" arts and crafts under the business name Natural Wonders to, among others, Penney. Flodine had a business liability insurance policy with State Farm. In 1998, Native American Arts, Inc. ("NAA") and the Ho-Chunk Nation brought suit against Penney alleging that its sale of products including Flodine's violated the Indian Arts and Crafts Act of 1990 ("IACA"), 25 U.S.C. § 305 et seq., which prohibits the offer, display for sale, or sale of any good "in a manner that falsely suggests it is Indian produced." Id. § 305e(a). Penney filed a third-party complaint against Flodine ("the Penney complaint") seeking damages in four counts: (1) contribution; (2) violation of the Illinois Fraud and Deceptive Business Practices Act ("Illinois Fraud Act"), 815 ILCS 505/1 et seq.; (3) breach of contract; and (4) breach of the implied warranty of merchantability.
On August 12, 1999, State Farm rejected Flodine's request to defend her in the Penney action. State Farm disclaimed coverage on the grounds that there was no allegation of an advertising injury as required by the policy and, even if there were such an allegation, a policy exclusion would apply. In November 1999, Flodine filed this action against State Farm seeking a declaration that State Farm was obligated to defend and indemnify her for the claims made against her in the Penney complaint. State Farm's January 6, 2000 answer includes two affirmative defenses: (1) the Penney complaint alleges no advertising injury caused by an occurrence in the course of advertising, as those terms are defined in the policy; and, alternatively, (2) two policy exclusions, 16 and 17, apply. State Farm moved for judgment on the pleadings on April 19, 2000. Flodine, in turn, moved for judgment on the pleadings as to State Farm's duty to defend. On February 27, 2001, this court denied State Farm's motion and granted Flodine's. See Flodine v. State Farm, No. 99 C 7466, 2001 U.S. Dist. LEXIS 2204 (N.D.Ill. Feb. 27, 2001).
While the motions for judgment on the pleadings were outstanding, Penney's third-party claims against Flodine were dismissed without prejudice on July 12, 2000. Flodine assigned her rights under the insurance policy to NAA. Accordingly, NAA was added as a plaintiff in this action. NAA, having also stepped into Penney's shoes, filed suit against Flodine on October 13, 2000. As a related case, that lawsuit was assigned to the same judge who had presided over the Penney litigation. The NAA complaint was based on the same transactions but included additional allegations and sought recovery on only three theories: (1) breach of contract; (2) breach of express warranty; and (3) breach of the implied warranty of merchantability. Flodine did not provide State Farm with notice of the NAA complaint. NAA and Flodine settled that case for $2.16 million on October 31, 2000.
On May 29, 2001, State Farm filed the present motion for leave to file a counter-complaint, which is directed toward the NAA complaint. Each of the three counts seeks a declaration that State Farm is not obligated either to reimburse Flodine for the defense of the NAA action or to pay any judgment entered in that case. Count I is based on Flodine's failure to provide notice of the NAA complaint and her voluntary assumption of liability without State Farm's consent, in alleged violation of policy conditions. In Count II, State Farm argues that the damages in the NAA complaint were not due to advertising injury caused by an occurrence in the course of advertising. Count III once again cites policy exclusions 16 and 17.
II. Analysis
Federal Rule of Civil Procedure 13(e) provides that "[a] claim which either matured or was acquired by the pleader after serving a pleading may, with the permission of the court, be presented as a counterclaim by supplemental pleading." Fed.R.Civ.P. 13(e). The premise of Rule 13(e) is that "[c]losely related claims should if possible be tried together to spare the parties and the American judicial system the diseconomies of multiple proceedings." Harbor Ins. Co. v. Cont'l Bank Corp., 922 F.2d 357, 361 (7th Cir. 1990). Thus, "[c]ounterclaims that are closely related to the claims already before the court normally should be permitted if they are interposed at any time prior to the trial stage." 6 Charles Alan Wright et al., Federal Practice Procedure § 1428, at 211 (2d ed. 1990). However, the court may exclude counterclaims that would engender inconvenience or confusion due to the progress or nature of the case. Nat'l Union Fire Ins. Co. v. Cont'l Illinois Corp., 113 F.R.D. 527, 530 (N.D.Ill. 1986).
A preliminary question of scope. Plaintiff NAA asserts that the court has already denied State Farm's motion as to Counts II and III. A review of the presentment transcript reveals otherwise. It is true that at one point the court suggested that the issues raised in Counts II and III had already been decided, but the court later asked counsel for State Farm to justify reinsertion of these claims and ultimately concluded, without limitation, that "[t]he motion for leave to file a counter complaint is going to be briefed, and it will be decided on the basis of the briefs." (Tr. 6/1/01 at 32.) The court will therefore consider all three counts.
Plaintiff NAA does not dispute that the proffered counterclaims are closely related to the subject matter of the current pleadings. Indeed, NAA takes almost the opposite position, arguing that Counts II and III are identical with issues already decided by this court. An implied corollary is that these two counterclaims did not mature after State Farm filed its answer because they actually derive from the Penney complaint. If that were true, Rule 13(e) would not apply and the claims would be redundant with State Farm's affirmative defenses. But, as State Farm accurately observes, the NAA complaint includes "narrower claims and differing allegations." (Reply at 4.) The particular legal theory alleged does not affect the duty to defend, William J. Templeman Co. v. Liberty Mut. Ins. Co., 735 N.E.2d 669, 676 (Ill.App.Ct. 2000) (duty to defend turns on facts, not legal theory, alleged), but may impact ultimate recovery under the policy. For example, although the court expresses no opinion on the merits of Count III, the omission of contribution and Illinois Fraud Act claims from the NAA complaint would appear to bolster State Farm's reliance on Exclusion 16(d) (excluding coverage for advertising injury "for which the insured has assumed liability in a contract or agreement"). Cf. Flodine, 2001 U.S. Dist. LEXIS 2204, at *39 ("[E]ven if this exclusion barred claims for breach of contract, it would not apply to the other claims for which State Farm owes Flodine a duty of defense."). Based on the record before the court, Count III appears to be a genuinely new counterclaim. No confusion or inconvenience would result and no additional discovery would be required, so Count III is allowed.
Notably, the NAA complaint specifically incorporates all of the allegations contained in the Penney complaint, so "differing" here means "additional."
On the other hand, the court perceives nothing in the NAA complaint that adds to State Farm's first affirmative defense. The legal theory of recovery does not appear to affect the analysis of whether, under the policy, the damages were attributable to an advertising injury caused by an occurrence in the course of advertising. The court's analysis of Penney's contribution claims, see Flodine, 2001 U.S. Dist. LEXIS 2204, at *18-37, applies with equal force to NAA's contract claims. The only additional allegation in the NAA complaint cited by State Farm is paragraph 7, which reads:
The allegations of the complaints in the [Penney litigation] taken together allege an advertising injury inflicted on Native American Arts which was caused by the sale of products by Nancy Flodine to J.C. Penney, which sales violated the IACA.
How this allegation could affect any of State Farm's claims or defenses is a mystery. To the extent this paragraph adds anything, it provides mere conclusions of law, not well-pleaded allegations of fact. The operative nucleus of alleged facts is essentially the same in the Penney and NAA complaints. Count II does not appear to be an after-acquired counterclaim at all, but rather an attempted end-run around this court's prior ruling. Unless State Farm can explain how this claim substantively differs from its first affirmative defense, allowing it would merely engender confusion and delay. See Fed.R.Civ.P. 12(f) ("[U]pon the court's own initiative at any time, the court may order stricken from any pleading . . . any redundant . . . matter."). State Farm's motion for leave to file Count II is therefore denied without prejudice.
As for Count I, there is no question at least that it matured after State Farm filed its answer in this case. Because the Penney and NAA complaints are so similar, neither can there be any question that the counterclaim is closely related to the subject matter of the current pleadings. Indeed, NAA's only objection to Count I is on its merits. NAA argues that its complaint against Flodine was merely an extension of the Penney litigation, so the notice Flodine provided State Farm of the Penney complaint satisfied its policy obligations. State Farm takes issue with NAA's characterization of its complaint as a "refiling" of the Penney complaint. This quibbling is most likely irrelevant, see NL Indus. v. Commercial Union Ins. Co., 926 F. Supp. 446, 456 (D.N.J. 1996), but a ruling on the merits at this time would be premature. Because the court does not believe allowing State Farm to assert this claim will generate inconvenience or confusion, State Farm's motion to file Count I is allowed.
In summary, the court grants in part and denies in part State Farm's motion to file a counter-complaint. Counts I and III are allowed; Count II is disallowed.