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SEVENTH AVE. BOUTIQUE, INC. v. AETNA INS. CO.

October 31, 1983

SEVENTH AVENUE BOUTIQUE, INC., PLAINTIFF,
v.
AETNA INSURANCE COMPANY AND SMALL BUSINESS ADMINISTRATION, DEFENDANTS.



The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Seventh Avenue Boutique, Inc. ("Boutique")*fn1 sued Aetna Insurance Company ("Aetna") for payment under a business personal property hazard insurance policy (the "Policy"). Boutique also named its secured lender, Small Business Administration ("SBA"), as a defendant, asserting the loss payable clause under the Policy entitled SBA to all the insurance proceeds. Aetna has deposited $22,708.08 (the "Fund") with this Court in settlement of its liability under the Policy.

At issue is the priority of two competing claims to the Fund: those of SBA and Boutique's attorneys (the law firm of Rabens, Formusa & Glassman, Ltd. ("Rabens").*fn2 For the reasons stated in this memorandum opinion and order, SBA is entitled to the entire Fund.

Facts*fn3

In October 1981 SBA loaned Boutique $100,000 on condition that Boutique obtain an equivalent amount of hazard insurance on all its equipment and inventory,*fn4 with a standard loss payable clause*fn5 protecting SBA's interest as a secured party. SBA simultaneously took a security interest in Boutique's inventory, fixtures, accounts and proceeds.*fn6 In compliance with the loan agreement Boutique obtained the requisite insurance from Aetna effective July 21, 1981 through July 21, 1982.

On February 14, 1982 a fire at Boutique's premises destroyed much of the insured property. Sometime after the fire Boutique filed for bankruptcy, and the bankruptcy judge ordered the insurance proceeds abandoned due to Boutique's lack of equity in those proceeds.*fn7

Rabens' Claim

In support of its claim Rabens cites Illinois "equitable fund" cases, under which subrogors' attorneys have recovered fees from their clients' subrogees in proportion to the benefits received by the latter from the attorneys' services.*fn8 Baier v. State Farm Insurance Co., 66 Ill.2d 119, 124, 5 Ill.Dec. 572, 574, 361 N.E.2d 1100, 1102 (1977), followed in Lemmer v. Karp, 56 Ill. App.3d 190, 13 Ill.Dec. 720, 371 N.E.2d 655 (2d Dist. 1977); Sobczak v. Whitten, 75 Ill. App.3d 208, 30 Ill.Dec. 733, 393 N.E.2d 1080 (5th Dist. 1979); accord. Remsen v. Midway Liquors, Inc., 30 Ill. App.2d 132, 174 N.E.2d 7 (2d Dist. 1961).

Those cases are inapposite to the present situation. SBA is not a mere subrogee to Boutique's rights against Aetna, for the loss payable clause (executed by Aetna's agent) grants SBA direct rights against Aetna wholly independent of Boutique. City of Chicago v. Maynur, 28 Ill. App.3d 751, 754, 329 N.E.2d 312, 315 (1st Dist. 1975); Aetna State Bank v. Maryland Casualty Co., 345 F. Supp. 903, 905 (N.D. Ill. 1972). SBA's independent contractual relationship places it in a different position from the derivative situation of a mere subrogee, whose interest is necessarily dependent on the subrogor's actual recovery from the tortfeasor. See Glidden v. Farmers Automobile Insurance Ass'n, 57 Ill.2d 330, 338, 312 N.E.2d 247, 251-52 (1974).

In applying the equitable fund doctrine, the Illinois courts recognize the subrogee's inherent reliance on the subrogor's efforts. For just that reason those courts have restricted such application to insurance subrogation cases or class actions. McKeeBerger-Mansueto, Inc. v. Board of Education of the City of Chicago, 691 F.2d 828, 835-36 (7th Cir. 1982); Maynard v. Parker, 54 Ill. App.3d 141, 145, 11 Ill.Dec. 898, 901, 369 N.E.2d 352, 355 (3d Dist. 1977), aff'd, 75 Ill.2d 73, 25 Ill.Dec. 642, 387 N.E.2d 298 (1979); Boehm and Weinstein, Chtd. v. City of Chicago, 62 Ill. App.3d 68, 70, 19 Ill.Dec. 489, 491, 379 N.E.2d 4, 6 (1st Dist. 1978).

Rabens argues its efforts resulted in benefit to SBA. SBA disputes that claim (R.Mem. 2-3). But even if Rabens were correct, under Illinois law that would not be enough to saddle SBA with Boutique's attorneys' fees. See McKee-Berger-Mansueto, 691 F.2d at 835; Kaplan v. Mahin, 79 Ill. App.3d 848, 851-52, 35 Ill.Dec. 481, 484-85, 399 N.E.2d 315, 317-18 (1st Dist. 1979). This Court cannot extend the "equitable fund" doctrine beyond its Illinois boundaries.

Conclusion

SBA's right to the Fund is superior to Rabens' claim. Accordingly, the Clerk of this Court is ordered to pay the entire Fund to SBA pursuant to its interest under the loss payable clause. This is a ...


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