ADDISON INSURANCE COMPANY, Plaintiff-Appellant, vs. KNIGHT, HOPPE, KURNICK & KNIGHT, L.L.C., Defendant-Appellee.
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IN THE COURT OF APPEALS OF IOWA
No. 9-342 / 08-1570
Filed July 22, 2009
ADDISON INSURANCE COMPANY,
Plaintiff-Appellant,
vs.
KNIGHT, HOPPE, KURNICK & KNIGHT, L.L.C.,
Defendant-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Linn County, Mitchell E. Turner,
Judge.
Appellant appeals the grant of summary judgment and asserts legal
malpractice against its former counsel. AFFIRMED.
Robert Hogg and Patrick M. Roby of Elderkin & Pirnie, P.L.C., Cedar
Rapids, for appellant.
James E. Shipman and Chad M. VonKampen of Simmons Perrine Moyer
Bergman, P.L.C., Cedar Rapids, and David Macksey and Victor J. Pioli of
Johnson & Bell, Ltd., Chicago, Illinois, for appellee.
Heard by Sackett, C.J., and Vogel and Miller, JJ.
2
VOGEL, J.
Addison Insurance Company (Addison) appeals the grant of summary
judgment in favor of its former counsel, Knight, Hoppe, Kurnik & Knight, L.L.C.
(Knight) on a legal malpractice claim. We affirm.
I. Background Facts and Proceedings
The underlying lawsuit was brought in New York on March 24, 1995, by
the administratrix of the Gary Ketten Estate after Ketten was killed in a vehicle
collision on April 2, 1993. The suit generally alleged Knoedler Manufacturing
Company (Old Knoedler) was liable for the manufacture of a defective truck seat.
Addison insured Old Knoedler at the time of the accident. On December 17,
1993, approximately nine months after the accident, Old Knoedler was sold to
Sturhand
Investments,
Inc.,
who
Manufacturers, Inc., (New Knoedler).
also
purchased
the
name
Knoedler
The sale was made under an asset
purchase agreement.1 Addison also insured New Knoedler from December 18,
1993, to December 18, 1994, but provided no coverage to New Knoedler for the
date of the accident, nor was there any assignment of insurance coverage in the
asset purchase agreement. The original Ketten lawsuit did not specify whether
the suit was against Old Knoedler or New Knoedler, but Addison provided a
defense to Old Knoedler for the lawsuit, incurring $419,060 in attorneys’ fees,
and $250,000 to settle the lawsuit.
Thereafter, Knight representing Addison, filed a declaratory judgment
action in Illinois against New Knoedler to recover these costs. New Knoedler
1
The asset purchase agreement was titled, “Agreement for the Purchase and Sale of
the Operating Assets of the Seat Line Division of Knoedler Manufacturers, Inc.”
3
filed a motion to dismiss, claiming Addison could not be subrogated to the
collateral contract rights of Old Knoedler. Addison claimed the lawsuit was not
based on subrogation rights, but on enforcement of an indemnity clause as
detailed in the asset purchase agreement. New Knoedler’s motion to dismiss
was granted, and Addison filed a motion to reconsider, which was denied. Knight
then filed Addison’s notice of appeal, but failed to file the record on appeal, a
requirement under the rules of the Supreme Court of Illinois. New Knoedler filed
a subsequent motion to dismiss, to which Knight did not respond, and the appeal
was dismissed in June 2002 for want of prosecution.
Addison then filed suit in the Iowa District Court for Linn County in June
2004, alleging negligent representation by Knight, and seeking to recover the
costs and settlement noted above, totaling $669,060.2
In May 2008, Knight
moved for summary judgment and Addison cross-moved for partial summary
judgment. Knight argued that although it failed to file a record on appeal, even
without this error, Addison would not have succeeded in the appeal such that the
judgment of the Illinois district court would have been reversed. The Iowa district
court, applying Illinois law, agreed and granted Knight’s motion for summary
judgment. Addison appeals.
II. Standard of Review
We review the grant or denial of summary judgment for errors at law.
Iowa R. App. P. 6.4. Summary judgment is appropriate
2
Addison is an Illinois corporation, with its principal place of business in Cedar Rapids,
Iowa. Our supreme court, on interlocutory appeal, held Iowa courts had personal
jurisdiction over Knight. See Addison Ins. Co. v. Knight, Hoppe, Kurnik & Knight, L.L.C.,
No. 05-0306 (Iowa June 29, 2007).
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if the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that
there is no genuine issue of material fact and that the moving party
is entitled to a judgment as a matter of law.
Iowa R. Civ. P. 1.981; Dudden v. Goodman, 543 N.W.2d 624, 626 (Iowa Ct. App.
1995). We review the record in the light most favorable to the party against
whom the summary judgment was granted. Johnson v. Farm Bureau Mut. Ins.
Co., 533 N.W.2d 203, 205-06 (Iowa 1995).
III. Legal Malpractice
Addison argues that the district court erred in granting summary judgment,
asserting that had Knight perfected the underlying appeal by filing the record, the
appeal would have been successful and the district court would have been
reversed. Addison claims that by failing to perfect the appeal, Knight committed
legal malpractice thereby causing Addison economic damages.
In cases involving litigation, no legal malpractice exists unless the
attorney’s negligence resulted in the loss of an underlying cause of action.
Governmental Interinsurance Exch. v. Judge, 850 N.E.2d 183, 187 (Ill. 2006).
Accordingly, the burden of pleading and proving actual damages requires
establishing that “but for” the attorney’s negligence, the client would have been
successful in the underlying suit.
Id.
In order to determine whether Knight
committed legal malpractice, we must first decide whether the underlying
declaratory judgment action in Illinois would have been reversed, had Knight filed
a record on appeal.3
3
Both parties agree, and the asset purchase agreement provides, it is to be governed by
the laws of the State of Illinois.
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IV. Collateral Contract Rights
Addison contends that under the asset purchase agreement, New
Knoedler expressly agreed to indemnify Old Knoedler. Specifically, Addison, as
the insurer of the indemnitee, Old Knoedler, claims that it was subrogated to the
rights of Old Knoedler as it defended and settled the lawsuit against Old
Knoedler, and therefore it may recover from New Knoedler, the indemnitor. Reid
v. Bootheel Transp. Co. Inc., 771 F. Supp. 237, 240 (N.D. Ill. 1991) (“Illinois
courts have uniformly held that an indemnitee’s subrogee has the right to recover
the amount the subrogee has paid on behalf of the indemnitee.”). Knight asserts
that Illinois law bars subrogation of Old Knoedler’s rights against New Knoedler
because the rights arose under a collateral contract, in this case the asset
purchase agreement.
Subrogation is the substitution of one individual (or entity) in the place of a
claimant to whose rights he (or the entity) succeeds in relation to the debt or
claim asserted which he (or the entity) has paid involuntarily. State Farm Gen.
Ins. Co. v. Stewart, 681 N.E.2d 625, 630 (Ill. App. Ct. 1997). An insurer who
indemnifies its insured for a loss may be subrogated to the rights of the insured
against the party at fault under the equitable doctrine that the economic burden
“should be shifted to the party responsible for the loss.” Id. The prerequisites to
subrogation are: (1) a third party must be primarily liable to the insured for the
loss; (2) the insurer must be secondarily liable to the insured for the loss under
an insurance policy; and (3) the insurer must have paid the insured under that
policy, thereby extinguishing the debt of the third party. Id. at 631. However,
when an insurer indemnifies its insured for property damage and then seeks to
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be subrogated to the insured’s collateral contract rights against the third-party
purchaser of that property not responsible for the loss, “the extent of the right to
subrogation is . . . difficult to determine . . . [and t]he fact that liability of the third
party . . . does not rest upon fault makes the relative equities of the insurer much
less appealing.” Id.
Addison cited various cases asserting that as an insurance company, it
had a right to recover the amount that a subrogee has paid on behalf of the
indemnitee. Spurr v. LaSalle Constr. Co., 385 F.2d 322, 331 (7th Cir. 1967);
Reid, 771 F. Supp. at 240; Rome v. Commonwealth Edison Co., 401 N.E.2d
1032, 1036 (Ill. App. Ct. 1980). However, in this case, New Knoedler was not
“primarily liable” as it was not the party responsible for the manufacture of the
faulty seat, and the accident occurred approximately nine months before it
purchased that division of Old Knoedler. Stewart, 681 N.E.2d at 631.
The district court determined that Addison’s payment on behalf of Old
Knoedler as its insurer was “wholly separate and unrelated to any obligation” of
New Knoedler to indemnify Old Knoedler, and that payment “cannot trigger any
right to proceed under subrogation” against New Knoedler. Under Illinois law, an
insurer who indemnifies its insured for property damage may not be subrogated
to the collateral contract rights of the insured against a third-party purchaser of
the subject property. Id. Old Knoedler and New Knoedler had an agreement for
the sale of the company that was separate, and therefore collateral, to any
agreement that Old Knoedler had with its insurance company, Addison. The
obligation of an insurer to its insured remains independent of the obligation of a
third-party purchaser to the insured, absent an assignment. Id. at 632.
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Addison asserts the district court erred in applying the rationale of Stewart,
as there was no indemnification agreement in Stewart. Instead, Addison points
us to Shell Oil Co. v. Hercules Construction Co., 219 N.E.2d 392 (Ill. App. Ct.
1966), which did contain an indemnification agreement, arising out of a purchase
order from Shell to its contractor, Hercules. However, in Shell, the court held that
the ultimate liability for the injury rested with Hercules, the “active wrongdoer,”
and therefore the indemnity agreement allowed Shell’s insurer to be subrogated
to Shell’s rights as against Hercules to recover the amount the insurer paid to the
injured party. Shell Oil Co., 219 N.E.2d at 394. The facts of Shell do not apply to
Addison, as New Knoedler, unlike Hercules, was not an “active wrongdoer.”
While an indemnity provision was involved in Shell, as it is in this case, Shell
turned on the fact that the indemnity provision could be enforced based on the
fault of the defendant-indemnitor, a fact lacking in this case.
The CNA case, which Knight cites as supporting its position, is similarly
distinguishable from the case at hand. CNA Ins. Co. v. DiPaulo, 794 N.E.2d 965
(Ill. App. Ct. 2003).
CNA, as the homebuyers’ insurer, paid the buyers for
damages caused by termites. It then sought to be subrogated to the buyers’ right
to pursue a fraud claim against the sellers for failing to disclose the termite
infestation. The court allowed the subrogation as “[t]he [homeowners’] policy
contained language whereby CNA obtained the [buyers’] rights to recover against
a third party if it paid for damage to the property.” Id. at 967. By contrast,
Addison seeks to be subrogated to the contract rights of Old Knoedler, but does
not assert any tort action that Old Knoedler would have had the right to assert
against New Knoedler, nor any assignment of such action.
8
Illinois case law is clear that an insurer may be subrogated to the insured’s
rights against any person wrongfully causing a compensable loss to the insured.
Stewart, 681 N.E.2d at 632. But when an insured’s claim for subrogation is
based solely on a collateral agreement, it can only be enforced under limited
circumstances, specifically: where fault is clear or there is an assignment of that
right. CNA Ins. Co., 794 N.E.2d at 969. Even with an indemnity provision, as
contained in both Shell and CNA, those respective courts ultimately relied on the
fault of the indemnitor to allow subrogation. Without fault playing any role in this
case, Addison cannot step into Old Knoedler’s role via subrogation by asserting a
contract right based on a “wholly unrelated” collateral agreement. We agree with
the district court that Addison’s payment on behalf of Old Knoedler, in regard to
the Ketten lawsuit, was not related to any obligation of New Knoedler to
indemnify Old Knoedler. Therefore, Addison did not have a right to proceed as
Old Knoedler’s subrogee against New Knoedler.
V. Indemnification Under the Asset Purchase Agreement
Aside from striking down Addison’s claim under the collateral contract
reasoning, the district court found the indemnity agreement of the asset purchase
agreement was ambiguous.
Addison disagrees and asserts the agreement
contains, in plain language, that New Knoedler shall indemnify Old Knoedler for
exactly the type of claim as the Ketten lawsuit. The asset purchase agreement
contained the following provisions:
8.1 Indemnification of Buyer. Except as provided in Section 8.2,
Seller shall indemnify, defend, and hold Buyer harmless from and
against any and all costs, expenses, losses, damages or liabilities
(including, without limitation, reasonable attorneys’ fees and
accounting fees) incurred by Buyer with respect to or in connection
9
with claims of third parties regarding the Division, the underlying
facts of which occurred prior to Closing.
8.2 Indemnification of Seller. Buyer shall indemnify, defend, and
hold Seller harmless from and against any and all costs, expenses,
losses, damages or liabilities (including, without limitation,
reasonable attorneys’ fees and accounting fees) incurred by Seller
with respect to or in connection with (i) claims of third parties
regarding the Division, the underlying facts of which occurred
following the Closing, (ii) all product warranty claims made after the
Closing with respect to the Division, and (iii) all product liability
claims made after the Closing with respect to the Division.
....
1.3 Assumed Liabilities. Buyer hereby assumes those liabilities of
Seller respecting the Contracts, Offers and all purchase
commitments for inventory and finished goods with respect, solely,
to the Division (collectively, the “Assumed Liabilities”). Except with
respect to the Assumed Liabilities specifically described in this
Section 1.3 or otherwise set forth in this Agreement, including
Sections 6.2, 7.1 and 8.2, Buyer does not assume, or take subject
to, any liabilities or obligations of Seller whatsoever, and any such
assumption is hereby expressly disclaimed, and Seller agrees to
indemnify and hold Buyer harmless from and against any and all
losses, claims, damages and liabilities (including, without limitation,
reasonable attorneys’ fees and expenses of investigation) arising
from or related to any such liability or obligation not assumed by
Buyer hereunder.
The district court found these sections to be ambiguous, reasoning:
In Section 8.1, Old K appears to promise to indemnify New K for
claims the underlying facts of which arose prior to closing, except
as provided by Section 8.2. In Section 8.2, New K appears to
promise indemnification to Old K for claims that arise after closing.
If New K were to indemnify Old K for claims arising after closing of
the contract, that would seem to render as rather extraneous and
empty the promise in 8.1 of Old K to indemnify New K for claims the
underlying facts of which arose prior to closing. Pursuant to 8.2, all
such claims filed after closing would seemingly become the
responsibility of New K. The Court thus finds the provisions of the
contract to be ambiguous. Given the ambiguity, the Court finds that
Plaintiff cannot show that it would have prevailed on appeal.
Addison argues the plain language in section 8.1 “excepts out” the provisions of
section 8.2, thus rendering section 8.2 as the controlling language and under it
10
“all” claims of product warranty and product liability are to indemnified by New
Knoedler.
However, even within section 8.2, there is conflicting language. In the first
subpart of 8.2, New Knoedler promised to indemnify Old Knoedler against any
“(i) claims . . . the underlying facts of which occurred following the Closing.” It
then continues on to state that it will indemnify Old Knoedler against, “(ii) all
product warranty claims made after the Closing . . . and (iii) all product liability
claims made after the Closing . . . .” We agree with the district court that the
provisions of the asset purchase agreement are not “plain” as Addison asserts,
but ambiguous as to the indemnity language.
In addition to agreeing with the district court that Addison cannot be
subrogated to Old Knoedler’s rights as against New Knoedler under a collateral
contract, we also agree the indemnity agreement is ambiguous. Without either
basis, Addison cannot show it would have prevailed on the appeal of the
declaratory judgment action had Knight perfected the appeal. We therefore find
the district court did not err in granting Knight’s motion for summary judgment.
AFFIRMED.
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