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July 29, 1983


The opinion of the court was delivered by: Prentice H. Marshall, District Judge.


These cases present the question whether an insured person or entity may under Illinois common law maintain a claim against an insurer for its bad faith conduct in handling a claim under an insurance policy. We are invited to reconsider our recent holding in Kelly v. Stratton, 552 F. Supp. 641 (N.D.Ill. 1982), that such a common law cause of action exists.

An Illinois statute, Ill.Rev.Stat. ch. 73, § 767 (1981), provides for an award of attorney's fees, costs, and a limited penalty upon a showing that an insurer acted vexatiously and unreasonably in connection with an insurance claim.*fn1 Some districts of the Illinois Appellate Court have interpreted the most recent version of § 767 as precluding any common law recovery based upon an insurer's bad faith. See Hamilton v. Safeway Insurance Co., 104 Ill. App.3d 353, 60 Ill.Dec. 97, 432 N.E.2d 996 (1st Dist. 1982); Tobolt v. Allstate Insurance Co., 75 Ill. App.3d 57, 30 Ill.Dec. 824, 393 N.E.2d 1171 (1st Dist. 1979).*fn2 These cases rejected Ledingham v. Blue Cross Plan, 29 Ill. App. 339, 330 N.E.2d 540 (5th Dist. 1975), rev'd as to costs, 64 Ill.2d 338, 1 Ill.Dec. 75, 356 N.E.2d 75 (1976), which held that an independent cause of action existed. Another court, in Hoffman v. Allstate Insurance Co., 85 Ill. App.3d 631, 40 Ill.Dec. 925, 407 N.E.2d 156 (2d Dist. 1980), while holding that § 767 barred a common law punitive damages claim against an insurer, held that the statute did not limit recovery of common law compensatory damages.

Given the lack of an Illinois Supreme Court ruling on the effect of § 767 and the divergent appellate holdings, the issue we faced in Kelly presented difficult questions of determination of state law under Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The defendant in No. 82 C 6789 has challenged our application of Erie as well as our substantive holding in Kelly. In addition, a recent opinion by our colleague, Judge Milton I. Shadur, provides an extensive critique of our Erie analysis in Kelly. Commercial Discount Corp. v. King, 552 F. Supp. 841, 847-52 (N.D.Ill. 1982). These factors militate in favor of a second look at these issues.*fn3


The first question is the effect of the various Illinois intermediate appellate decisions concerning § 767. In Kelly, we held that while the appellate court decisions provided "data" for our determination of state law, they were not controlling. Kelly, 552 F. Supp. at 644-45. Rather, we held that we were required to determine how the Illinois Supreme Court would decide the issue. In doing so, we expressed our disagreement with Judge Shadur's analysis of the Erie issue. See, e.g., Slate Printing Co. v. Metro Envelope Co., 532 F. Supp. 431, 434 (N.D.Ill. 1982); Bonanno v. Potthoff, 527 F. Supp. 561, 563 (N.D.Ill. 1981); Instrumentalist Co. v. Marine Corps League, 509 F. Supp. 323, 329 (N.D.Ill. 1981); National Can Corp. v. Whittaker Corp., 505 F. Supp. 147, 148-49 n. 2 (N.D.Ill. 1981). In those cases, as in Commercial Discount, Judge Shadur held that a court of this district, in determining state law, must act as a state trial court. Where the various Illinois appellate districts are in conflict, Judge Shadur further held, a judge of the Northern District of Illinois must apply the law of the First District of the Illinois Appellate Court, the appellate district in which this federal district court sits. In Commercial Discount, he noted that were a case to be presented in which the proper Illinois venue was other than the First District, then the law of the district of proper venue must be applied. Commercial Discount, 552 F. Supp. at 850.*fn4

It is true, as Judge Shadur suggests, that we must avoid applying a rule that would permit a litigant to forum shop by choosing to bring his action in federal court if he found the law of the relevant state appellate district unfavorable, hoping to find a more sympathetic ear on the federal bench. See Bernhardt v. Polygraphic Co. of America, Inc., 350 U.S. 198, 203-04, 76 S.Ct. 273, 276-77, 100 L.Ed. 199 (1956); Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). However, we think that Commercial Discount begins with an erroneous premise: that a federal court sitting in diversity jurisdiction "must decide substantive questions . . . in the same way that a state trial judge counterpart sitting at the same location would." Commercial Discount, 552 F. Supp. at 847 (quoting National Can Corp. v. Whittaker Corp., 505 F. Supp. 147, 148 n. 2 (N.D.Ill. 1981)) (emphasis supplied). The error of this premise affects the remainder of the Commercial Discount analysis.

The proposition that we must act as state trial judges stems from a misapprehension of the commands of Erie and its progeny. Erie requires a federal court to apply the substantive law of the forum state; we take this to mean that we must apply the law that ultimately would be applied were the case to be litigated in the state courts. While intermediate appellate decisions exert upon us a high degree of persuasive force, and while they may be binding upon state trial courts, the law we must apply is that which the state supreme court would apply.*fn5 In a given case we may choose to follow an intermediate appellate ruling, but we may not end our analysis of state law with mere citation to such rulings where we are persuaded that the state supreme court would rule otherwise. See generally In re Air Crash Disaster Near Chicago, Illinois on May 25, 1979, 701 F.2d 1189, 1196-98 (7th Cir. 1983) (Appeal of American Airlines, Inc.).

The policy behind this principle is Erie's concern with avoiding forum shopping between state and federal courts. Applying the law that the state supreme court would follow is necessary if we are to avoid creating an incentive for such forum shopping. The "state trial court" approach creates an incentive for forum shopping in that it requires the federal courts to give more weight to state intermediate appellate decisions than they would be given in the state system. This may be illustrated by three examples.

In a case in which no supreme court decision exists and the appellate district of proper state venue has not yet taken a position on an issue, Commercial Discount would require a federal court to follow the law as declared by the other appellate districts. Commercial Discount, 552 F. Supp. at 848 (citing People v. Thorpe, 52 Ill. App.3d 576, 579, 10 Ill.Dec. 351, 354, 367 N.E.2d 960, 963 (2d Dist. 1977) and Garcia v. Hynes & Howes Real Estate, Inc., 29 Ill. App.3d 479, 482, 331 N.E.2d 634, 636 (3d Dist. 1975)). However, the very fact that the various Illinois appellate districts sometimes conflict on an issue of law indicates the problem inherent in the state trial court approach. The appellate districts, it appears, do not consider each others' decisions binding; rather, they regard them as persuasive authority only. Thus, if a litigant filed suit in a state court in the First District and the only intermediate appellate decision on a pertinent issue was from the Fourth District, while the trial court presumably would follow the Fourth District ruling, on appeal the First District would not necessarily do so, if it found persuasive reasons to do otherwise. In such a case, if diversity of citizenship existed, the litigant favored by the Fourth District rule could file the case in federal court (or remove it, if there was diversity of citizenship, in the case of a non-Illinois defendant) and thereby obtain "insurance" that the favorable rule of law would be applied and upheld on appeal, were Commercial Discount to apply.

The same is true even where "First District law" exists. The First District has five divisions. It appears that the different divisions do not consider themselves bound by the holdings of other divisions. See, e.g., Bonnano v. Potthoff, 527 F. Supp. 561, 563-64 (N.D.Ill. 1981) (Shadur, J.) (discussing conflicting holdings of Third and Fifth Divisions on issue of date of accrual of cause of action); Commercial Discount, 552 F. Supp. at 843-45 (discussing apparent difference in decisions in different divisions on question of effect of failure to give notice of sale of repossessed goods).*fn6

To note an example of recent origin, a controversy existed within the First District over the question whether a prosecutor must justify his or her use, within a particular case, of peremptory challenges to exclude minority group members from a jury. Compare People v. Gosberry, 109 Ill. App.3d 674, 65 Ill.Dec. 99, 440 N.E.2d 954 (1st Dist., 3d Div. 1982) and People v. Payne, 106 Ill. App.3d 1034, 62 Ill.Dec. 744, 436 N.E.2d 1046 (1st Dist., 3d Div. 1982) with People v. Newsome, 110 Ill. App.3d 1043, 66 Ill.Dec. 708, 443 N.E.2d 634 (1st Dist., 2d Div. 1982) and People v. Teague, 108 Ill. App.3d 891, 64 Ill.Dec. 401, 439 N.E.2d 1066 (1st Dist., 1st Div. 1982). Because one division does not consider itself bound by the others' holdings,*fn7 application of the "law" of the First District where not all divisions have spoken may result in a litigant obtaining a result that would not obtain were the case to be litigated in state court.*fn8 Commercial Discount, therefore, permits a diversity litigant in whose favor the non-unanimous but not as yet uncontradicted rule runs to obtain "insurance" by bringing the case in federal court or removing it there.

The third type of forum shopping permitted by Commercial Discount is somewhat more subtle. The doctrine of that case requires federal courts to give more weight to state appellate decisions than the rendering courts themselves would give them. The "state law" that Erie requires us to follow also includes the power of a state court to reexamine its earlier holdings based upon "data" not considered in the earlier decision; Erie, we think, permits a federal court to exercise the same authority. As two noted commentators have stated,

    Unless a federal court is allowed this much
  freedom and flexibility, the Erie doctrine simply
  would have substituted one kind of forum-shopping
  for another. The lawyer whose case was dependent
  on an ancient or shaky state court decision that
  might no longer be followed within the state
  would have a strong incentive to bring the suit
  in or remove it to federal court, hoping that the
  state decision

  could not be impeached under the mechanical
  application of existing state precedents that the
  Erie doctrine was once thought to require.
  Moreover, to give state court decisions more
  binding effect than they would have in the state
  court system would undermine the ability of the
  federal courts to ensure that the outcome of the
  litigation be substantially the same as it would
  be if tried in a state court and subjected to
  that system's appellate process.

19 C. Wright, A. Miller & Cooper, Federal Practice and Procedure § 4507 at 89-91 (1982) (emphasis supplied).*fn9

Thus, Commercial Discount does permit forum-shopping of a sort, in that a federal court is required to give state intermediate appellate precedent more weight than it would carry in other state appellate tribunals and even in the rendering panel itself. These are "uncertaint[ies] already present in state law." Commercial Discount, 552 F. Supp. at 852 (emphasis in original). The view we espoused in Kelly — application in all cases of the "Supreme Court predictive" approach — has the disadvantage of being something less than a bright line, easily applicable rule.*fn10 It is, however, faithful to Erie and its progeny.*fn11

In addition to its potential for encouraging forum shopping, Commercial Discount will, at least in some cases, give rise to a waste of litigants' and courts' resources. Where a state appellate court has ignored a critically important "datum" of state law — in Kelly v. Stratton, certain doctrines of statutory construction — and has reached a result that is incorrect even as a matter of state law, Commercial Discount would require us to follow the appellate court ruling and reach a similarly erroneous result, despite the existence of persuasive reasons for believing that the state supreme court would not so hold.*fn12 As Judge Shadur presumably would not require a federal appellate court to act as a state trial court (because the two are not "counterparts"), the result is to require the district court to commit error and leave it to the court of appeals to correct the error.*fn13 So read, Commercial Discount elevates form over substance and promotes the needless expenditure of courts' and litigants' resources.*fn14 We do not find in Erie or its progeny the rigidity that Commercial Discount appears to require.

The principles of Illinois stare decisis to which we have made reference must be recognized by a federal diversity court if it is to avoid the forum shopping potential recognized by Wright and Miller in the quoted passage. Again, the central principle is that we must give appellate court holdings their due where the supreme court has not spoken, but we must not give them more than their due. This will require resort to the "Supreme Court predictive approach," but to do otherwise would be to ignore the policy of Erie and its progeny. That policy is the avoidance of forum shopping. When we apply the law that ultimately would be applied were the case litigated in state court, we are fully faithful to Erie. By contrast, to act as a state trial court, following intermediate appellate decisions that are erroneous as a matter of state law, not only would violate the policy of Erie, but would also elevate form over substance, as the court of appeals, assuming the role of its state counterpart, would apply the correct rule of state law.*fn15

Erie requires us, in all cases, to apply the rule of law that the state supreme court would follow. Despite our rejection of the state trial court approach, however, we are not cast adrift without a rudder. Several general rules exist to guide our construction of state law.

One such rule is that a federal court should not attempt "dramatic innovation" in state law. Murphy v. White Hen Pantry Co., 691 F.2d 350, 355 (7th Cir. 1982). See also Lamb v. Briggs Manufacturing Co., 700 F.2d 1092, 1096 (7th Cir. 1983).*fn16 This appears to be a corollary of the rule that a federal court may not "substantially affect the enforcement of the right as given by the State." Guaranty Trust Co. v. York, 326 U.S. 99, 109, 65 S.Ct. 1464, 1470, 89 L.Ed. 2079 (1945).

Another set of guideposts is set forth in McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657 (7th Cir.), cert. denied, 449 U.S. 976, 10 ...

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