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American Re-insurance v. Mgic Investment





APPEAL from the Circuit Court of Cook County; the Hon. NATHAN M. COHEN, Judge, presiding.


Defendants filed these consolidated interlocutory appeals from orders denying their motions to: (1) stay all court proceedings against them pending completion of arbitration proceedings ordered by the Supreme Court of the State of New York, and (2) vacate the orders allowing plaintiff to deposit certain funds in an interest bearing account with a court approved trustee. On appeal, defendants contend that the denial of their motions was erroneous and should be reversed.

The following facts, appearing in the record, are pertinent to the disposition of this appeal.

On September 14, 1970, plaintiff and defendants entered into a re-insurance agreement or "treaty." This agreement essentially provided that in return for defendants' payment of 21.55 percent of the premiums on their lease guarantee insurance policies, plaintiff would re-insure defendants for 80 percent of the amount of their losses under those policies. The agreement also contained an arbitration clause. This clause provided that "any irreconcilable dispute" which arose between plaintiff and defendants in connection with the agreement would be submitted to a "Board of Arbitration." The makeup of the arbitration board, procedure for its selection, filing time requirements and other details were specified. Also specified was that "[a]ny arbitration shall take place in the City of New York, New York, unless otherwise mutually agreed." Although the agreement, including the arbitration clause, was subsequently amended on several occasions, the arbitration requirement described above was in all material respects retained.

On March 9, 1977, plaintiff filed a complaint against defendant MGIC Investment Corporation (MGIC) and against defendants who were allegedly "wholly-owned subsidiaries" of MGIC. Plaintiff stated in the complaint that defendants were "conditionally necessary parties to this action, in order to render the relief sought herein, i.e., rescission of the [re-insurance] treaty, complete and effective." Counts I and III of the complaint alleged that MGIC caused defendants to "advance its own independent financial interests" by "[g]enerally giving preferential treatment to valued clients of MGIC even when such treatment was adverse to the best interests" of both defendants and plaintiff. These counts specifically alleged that MGIC induced defendants to reject sound underwriting and insurance claim practices in order to issue policies and pay questionable, unwarranted or uncovered claims, solely because the policy holders or beneficiaries were valued customers of MGIC. Count II of the complaint alleged that MGIC breached and induced defendants to breach certain representations of fact upon which plaintiff relied. Based on the above allegations and the resulting losses which allegedly occurred, plaintiff requested in each count of its complaint that the re-insurance treaty between it and defendants be rescinded, that damages be assessed against MGIC, and that other appropriate relief be entered. Simultaneous with the filing of this complaint, plaintiff filed an "emergency motion for deposit of funds," which sought permission to deposit with the court certain funds claimed by defendants as due and owing under the terms of the re-insurance treaty. That same day, the trial court issued an ex parte order allowing plaintiff to deposit $739,429.46 in an interest-bearing account with an approved trustee. The order provided that this deposit would not be treated as an admission by plaintiff of its liability to defendants or of the validity of the re-insurance treaty, and that defendants were not to treat plaintiff's failure to pay the deposited funds to them as a default or violation under the treaty. During the course of the subsequent proceedings, pursuant to court orders, plaintiff deposited with the same trustee additional funds apparently due to defendants under the re-insurance agreement, as well as funds paid to it under the agreement by defendants. On February 1, 1978, it was ordered by the court pursuant to the stipulation of the parties that plaintiff continue to make periodic deposits in accordance with the terms of the March 9, 1977, order, pending the outcome of this appeal.

On April 7, 1977, MGIC filed a petition for removal of the action to the United States District Court for the Northern District of Illinois, alleging that there was diversity of citizenship and that the claims asserted against MGIC were separate and independent from the claims asserted against defendants. On the same day in New York, defendants served a notice and demand for arbitration on plaintiff, and filed in the New York State Supreme Court a petition to compel arbitration. Subsequently, in Federal court, MGIC moved to quash the service of summons and dismiss the complaint, while defendants asked the court to stay the action pending the outcome of arbitration in New York. Plaintiff responded by filing a motion in Federal court to remand the action to the Circuit Court of Cook County, and also filing motions in the Federal and New York courts> asking for stays of any arbitration. Defendants countered with a motion in the New York court to issue a preliminary injunction enjoining plaintiff from proceeding with their action in any other jurisdiction. On May 20, 1977, while the motions in Federal court were pending, a memorandum decision on the motions filed in New York was issued by Justice Nathaniel T. Helman of the New York Supreme Court. This decision granted defendants' motion to compel arbitration, denied plaintiff's motion to stay arbitration, and denied defendants' motion for a preliminary injunction enjoining plaintiff from proceeding with its action, which was still pending in Federal court. Plaintiff and defendants appealed from the portions of the judgment which denied their motions, and the New York Supreme Court's appellate division unanimously ordered the judgment affirmed. Plaintiff's motion for appeal to the New York Court of Appeals was subsequently denied.

In a memorandum opinion issued on September 20, 1977, Judge Herbert L. Will of the United States District Court found that there was not complete diversity of citizenship, that plaintiff's complaint did not state separate and independent claims, and that the action would accordingly be remanded to the Circuit Court of Cook County. Defendants filed motions in that court on November 14 and December 1, respectively, to dismiss or alternatively stay the action pending completion of the arbitration proceedings in New York, and to vacate the March 9 order and all subsequent orders incident thereto which allowed plaintiff to deposit funds with the court approved trustee. Following a hearing and argument, the court denied defendants' motions, and they filed their notice of interlocutory appeal. Pursuant to the stipulation of the parties, it was ordered and agreed that except for certain discovery matters and future deposits of funds, the proceedings in New York and in the trial court would be stayed pending the outcome of this appeal.


Defendants first contend that by denying their motion to stay the action pending completion of the arbitration proceedings in New York, the trial court improperly failed to give "full faith and credit" to a final judgment of a court of a sister State. The full faith and credit clause of the Constitution (U.S. Const., art. IV, § 1) as implemented by statute (28 U.S.C. § 1738 (1976)) requires that judicial proceedings shall have the same full faith and credit in all courts> as they have in the courts> of the State from which they are taken. Defendants assert and plaintiff agrees that under New York law an order compelling arbitration entered upon proper jurisdiction, is a final, reviewable judgment (Marchant v. Mead-Morrison Manufacturing Co. (1929), 252 N.Y. 284, 169 N.E. 386), which is therefore entitled to full faith and credit in Illinois. (See People v. Western Tire Auto Stores, Inc. (1965), 32 Ill.2d 527, 207 N.E.2d 474.) Defendants submit that in order to give full faith and credit to the New York judgment compelling plaintiff and defendants to arbitration, the trial court was required to stay its own proceedings on plaintiff's action.

• 1, 2 The New York order referred to did grant defendants' motion to compel arbitration. However, it also denied defendants' application for a preliminary injunction to prevent plaintiff from continuing with its action. It has been repeatedly held that even where another State does enjoin litigants from proceeding with a previously instituted Illinois action, neither the full faith and credit clause nor rules of comity compel Illinois courts> to recognize such an injunction and abate or preclude their disposition of the pending case. (See, e.g., James v. Grand Trunk Western R.R. Co. (1958), 14 Ill.2d 356, 152 N.E.2d 858, cert. denied (1958), 358 U.S. 915, 3 L.Ed.2d 239, 79 S.Ct. 288; Kleinschmidt v. Kleinschmidt (1951), 343 Ill. App. 539, 99 N.E.2d 623.) In this case, however, the New York order, affirmed there on appeal, specifically declined to enjoin the Illinois proceedings. The United States Supreme Court has explained that the full faith and credit which must be given to a foreign judgment is only the credit it would be accorded in the State which rendered it. (See Durfee v. Duke (1963), 375 U.S. 106, 11 L.Ed.2d 186, 84 S.Ct. 242; Morris v. Jones (1947), 329 U.S. 545, 91 L.Ed. 488, 67 S.Ct. 451.) It therefore appears that in ruling on defendants' motion to stay the proceedings below, the trial court correctly noted:

"The defendants here have argued that this Court must give full faith and credit to the New York court's judgment directing the parties to arbitration in New York. This Court has not and does not intend to, in any fashion, interfere with that order.

But, meanwhile, the effect of their [New York] judgment is not to stay these proceedings."

Defendants argue that the New York court was "influenced" against granting an injunction because the action was at that time pending in Federal court, and a State court cannot properly enjoin parties from proceeding with a Federal court action. (See Donovan v. City of Dallas (1964), 377 U.S. 08, 12 L.Ed.2d 409, 84 S.Ct. 1579.) It is true, as defendants emphasize, that the New York order referred to the rule against enjoining Federal court proceedings, and specifically referred to those proceedings when it denied defendants' motion. We note, however, that defendants' motion had prayed that plaintiff be enjoined from continuing "any action which has or may be commenced." The New York court itself, prior to ruling on the motion, characterized it as seeking "to enjoin and restrain [plaintiff] * * * from proceeding with their [sic] action in Illinois, and from commencing any other action or proceeding in any other Court * * *." In light of this characterization and the principle that the issues in a case are created by the pleadings (People ex rel. Henderson v. Redfern (1966), 75 Ill. App.2d 196, 220 N.E.2d 323), it is clear that in denying defendants' motion, the New York court was declining to issue an injunction against proceedings in either the State or Federal court in Illinois. We further note that when the New York order was appealed, it was pointed out that the Federal court had ruled on MGIC's petition for removal, and had remanded the action back to the circuit court where it had originally been filed. The appellate court there nevertheless affirmed the lower court's order. In light of the above, it appears that the trial court, by refusing to stay its own proceedings, did not fail to give full faith and credit to the New York order.

• 3-5 Defendants nevertheless argue that the "only meaningful way to give full faith and credit" to the New York judgment is to require that a stay be imposed below. They point to the portions of plaintiff's complaint which allege that MGIC caused defendants to breach certain of their duties under the agreement, and state that the allegations in plaintiff's complaint "could not be adjudicated without first deciding issues that the New York courts> have ruled must be decided by arbitration." Defendants therefore argue that the action in the trial court should not proceed until the arbitration in New York is completed. We reject this argument. As we indicated above, in spite of what defendants assert would be "meaningful," the trial court was certainly not required by full faith and credit to go ...

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