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LASALLE NATL. TRUST, N.A. v. SCHAFFNER

March 24, 1993

LaSALLE NATIONAL TRUST, N.A., as Successor Trustee Under Trust Number 114077, Plaintiff,
v.
JERRY SCHAFFNER, MARTIN SCHAFFNER, CHICAGOLAND LAUNDRY AND CLEANERS, INC., and NATIONAL BOULEVARD BANK OF CHICAGO, as Trustee Under Trust Agreement dated July 30, 1982, and known as Trust Number 6899, Defendants. HARPER REALTY, INC., and WILLIAM LEVY, Third-Party Defendants. JERRY SCHAFFNER, MARTIN SCHAFFNER, CHICAGOLAND LAUNDRY AND CLEANERS, INC., Counter-claimants, v. LaSALLE NATIONAL TRUST, N.A., as Successor Trustee Under Trust Number 114077, Counter-defendant. JERRY SCHAFFNER, MARTIN SCHAFFNER, CHICAGOLAND LAUNDRY AND CLEANERS, INC., Third-party Plaintiffs, v. ILLINOIS EMPLOYERS INSURANCE OF WAUSAU, CONTINENTAL CASUALTY COMPANY, AMERICAN CASUALTY COMPANY, and LIBERTY MUTUAL INSURANCE COMPANY, Third-party Defendants.



The opinion of the court was delivered by: WILLIAM T. HART

 Plaintiff, LaSalle National Trust ("LaSalle"), is legal owner of real property located at 2901 North Clybourn in Chicago, Illinois. Defendants, Jerry Schaffner and Martin Schaffner (the "Schaffners") are residents of Illinois. Defendant, Chicagoland Laundry and Cleaners, Inc. ("Chicagoland") is an Illinois corporation run by the Schaffners and conducting business in this State. *fn1" Defendant, National Boulevard Bank of Chicago ("National") is an Illinois bank conducting business in this State and was the holder of legal title to the property for the sole beneficial owners, the Schaffners.

 According to LaSalle's complaint, the Schaffners operated the Chicagoland dry cleaning business on the property from at least 1980 to approximately January, 1989. In approximately June 1990, plaintiff discovered the presence of tetrachloroethylene/perchloroethylene ("PCE") *fn2" in the property. Plaintiff believes defendants used PCE on the property and "knew or should have known of the release of PCE and other volatile organic compounds" into the "soil and groundwater at the Property, prior to [LaSalle's] purchase." Compl. at PP 17, 18. In June 1990, underground storage tanks leaking other known contaminants necessitated soil testing. The tests informed plaintiff of the presence of PCE and plaintiff arranged for site cleanup. As of the date of the complaint, defendants had not reimbursed plaintiff for any of the cleanup costs.

 On December 28, 1991, LaSalle sued defendants under § 107 of the Comprehensive Environmental Response, Compensation and Liability Act of 1990 ("CERCLA"), 42 U.S.C. §§ 9601-57, for necessary response costs and stated pendent state law claims. Plaintiff's first two causes of action claim violation of CERCLA's strict liability provisions for prior owner/generators. The second cause alleges fraudulent nondisclosure of the PCE contamination in connection with the sale of the property to LaSalle. LaSalle's remaining causes of action allege private and public nuisance, negligent hazardous waste disposal, negligence (all resulting in property damage), trespass and breach of contract. Jurisdiction in this underlying complaint is based on 42 U.S.C. § 9613(b) of CERCLA and 28 U.S.C. § 1331.

 On April 17, 1992, Chicagoland and the Schaffners filed a first amended third-party complaint (the "Chicagoland complaint") against Illinois Employers Insurance of Wausau ("Wausau"), Continental Casualty Company ("Continental"), American Casualty Company ("American"), Liberty Mutual Insurance Company ("Liberty") (collectively "the Insurers"), Harper Realty, Inc. and William Levy. Jurisdiction over the third-party action is premised on 28 U.S.C. §§ 1331, 1367 and CERCLA. William Levy and Harper Realty, Inc. are sued as beneficial owners of the current LaSalle trust. Chicagoland and the Schaffners sue the Insurers under policies covering periods from August 1971 to August 1989.

 According to the Chicagoland complaint, Chicagoland wrote the Insurers *fn3" regarding environmental property contamination relating to underground storage tanks and PCE. Liberty and Wausau responded by outlining potential coverage defenses and requesting extensive additional information about the contamination. Chicagoland sent Wausau and Liberty information. Neither Continental nor American responded. From the Summer of 1990 through the Summer of 1991, LaSalle and Chicagoland attempted to investigate the nature and extent of the PCE contamination, receiving conflicting reports regarding approaches to remediation. On November 27, 1991, Chicagoland wrote Insurers to advise that LaSalle had asserted a "pre-litigation demand" due to the PCE contamination and to request that Insurers settle.

 JURISDICTION OVER THIRD-PARTY CLAIMS

 On August 8, 1992, this court (Rovner, J.) denied Insurers' motion to dismiss Chicagoland's third-party claims. The Insurers' motion to dismiss argued lack of subject matter jurisdiction over Chicagoland's third-party insurance claims. Fed. R. Civ. P. 12(b)(1). On November 20, 1992, Wausau, Continental and American moved for reconsideration of the jurisdiction issue.

 Chicagoland brought the third-party action against Insurers under supplemental jurisdiction, 28 U.S.C. § 1367(a). Section 1367 (effective prospectively for civil actions commenced after December 1, 1990) addresses the supreme Court's decision in Finley v. United States, 490 U.S. 545 (1989). In Finley, the Supreme Court abolished pendent party jurisdiction lacking an independent jurisdictional basis and cast doubt over the continuing availability of ancillary jurisdiction for similar third-party claims. See Washington Hosp. Center v. Collier, 292 U.S. App. D.C. 129, 947 F.2d 1498, 1501 (D.C. Cir. 1991). Congress responded with amended § 1367, conferring "supplemental jurisdiction" over all claims "so related to claims in [an] action within [the court's] original jurisdiction that they form part of the same case or controversy under Article III." 28 U.S.C. § 1367(a).

 Judge Rovner based her denial of Insurers' motion on § 1367, the D.C. Circuit's holding in Collier, and the impleader rule, Fed. R. Civ. P. 14(a). Judge Rovner rejected the Insurers' argument that the underlying CERCLA complaint and the third-party action do not derive from a "common nucleus of operative fact such that they ordinarily would be tried together." The court's order held that "the third-party claims against the insurers fall squarely within the Court's jurisdiction under 28 U.S.C. § 1367(a)."

 Judge Rovner noted that Chicagoland had followed Rule 14(a) precisely by impleading the Insurers, who "may be liable to [Chicagoland] for all or part of [LaSalle's] claim." "Nothing in 28 U.S.C. § 1367, the new statute codifying the supplemental jurisdiction of the federal courts, alters the propriety of this longstanding impleader practice." Aug. 7, 1992 Op. The Collier decision *fn4" does not apply the more permissive § 1367, but rather concludes that pre-§ 1367 case law, Finley, 490 U.S. 545, Owen Equip. & Erection Co. v. Kroger, 437 U.S. 365, 375 (1978), and United Mine Workers of Am. v. Gibbs, 383 U.S. 715, 725 (1966), allows ancillary (supplemental) jurisdiction over third-party claims *fn5" where the insurer-third-party defendant may be liable over for some or all of the amount sought in the underlying claim.

 The decisions again relied upon by the Insurers, Hudson Insurance Co. v. American Elec. Corp., 957 F.2d 826, 830-31 (11th Cir. 1992) and McGraw-Edison Co. v. Speed Queen Co., 768 F. Supp. 684 (E.D. Wis. 1991), are, as Judge Rovner noted, inapposite. In Hudson, the insurance company was not impleaded on the underlying claim, which had already been resolved. Therefore, insured's direct action against the insurer lacked any federal basis apart from the underlying claim. Hudson, 957 F.2d at 830-31. The plaintiff in Speed Queen asserted CERCLA jurisdiction over one defendant and supplemental jurisdiction over a direct action against the insurer. 768 F. Supp. at 686 Finley prevented pendent party jurisdiction and § 1367 was not yet applicable. Id. at 687. *fn6" Again, Speed Queen did not involve a supplemental third-party claim tied directly to the outcome of an underlying, pending federal claim.

 The issue of whether the insurer will be sued as a third party generally arises only in instances such as this where the insurer has disclaimed the duty to defend. 6 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure 2d, § 1449 at 392 (1990) [hereinafter Federal Practice]. The Insurers' denial of coverage does not affect this court's jurisdiction over the third-party action. Insurers contend that Chicagoland's motion for stay and severance of the third-party insurance claims is inconsistent with the basis for jurisdiction over the third-party action. However, the propriety of a stay or severance of the insurance issues to prevent prejudice would not affect the basis for jurisdiction over those claims. The reason for a third-party action, to maximize efficiency over dependant claims, is not eliminated by a severance of issues intended to prevent prejudice. See 6 Federal Practice § 1449 at 392-93. Indeed, Rule 14(a) specifically provides for severance.

 Wausau argues that the LaSalle and Chicagoland claims do not derive from a common nucleus of operative fact. However, Chicagoland's claim against Insurers seeks indemnity for liability arising from the same facts as the underlying complaint. Chicagoland's duty to defend claim is based on the complaint, an allegation of the facts in the underlying case. Therefore, Chicagoland's claims "form part of the same case or controversy" for purposes of supplemental jurisdiction. See Estate of Bruce v. City of Middletown, 781 F. Supp. 1013 (S.D.N.Y. 1992) (supplemental jurisdiction for indemnity claim). Compare Mitcheson v. Harris, 955 F.2d 235, 239 (4th Cir. 1992) (recognizing appropriateness of abstaining in declaratory action when underlying claim pending in state court; noting overlapping issues of fact and law). Claims that derive from a common nucleus of operative fact would ordinarily be tried together and form part of the same case or controversy. See Gibbs, 383 U.S. at 725. Only a loose factual connection is necessary. Freiburger v. Emery Air Charter, Inc., 795 F. Supp. 253, 258 (N.D. Ill. 1992). In this case there is more than a mere loose factual connection between the insurance actions and the underlying complaint. Furthermore, it would be expected that a defendant, haled into federal court, would attempt to resolve issues of the duty to defend in that same proceeding. See 6 Federal Practice § 1449 and cases cited therein discussing impleader of insurer. The Insurers' focus on facts with no nexus in either action misses the larger point of the indemnity sought by Chicagoland based on the outcome of the LaSalle action. Similarly, Wausau's abstention arguments are unpersuasive. *fn7"

 American and Continental argue that the "no joinder" clauses in those policies prevent the third-party action in this case. *fn8" Wausau has also filed a motion to dismiss on this issue, which the court instructed would be treated as a motion for summary judgment. Such clauses contravene the purposes of Rule 14(a) and are ignored by most federal courts. 6 Federal Practice § 1449 at 395; see Colton v. Swain, 527 F.2d 296, 299 (7th Cir. 1975); Jordan v. Stephens, 7 F.R.D. 140 (D. Mo. 1945); see also Hall v. Allstate Ins. Co., 880 F.2d 394, 397-98 (11th Cir. 1989). In Colton v. Swain, the Seventh Circuit held that although a procedural rule, Rule 14, should not create a substantive right of action where Illinois substantive law and the insurance contract disallow direct actions against insurers, the refusal to defend estops the insurer's right to insist on adherence to ...


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