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Arthur Anderson LLP v. Federal Insurance Co.

March 16, 2007


The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer


Plaintiff Arthur Andersen LLP ("Andersen") alleges that an indemnification policy issued by Defendant Federal Insurance Company ("Federal") obligated Federal to defend Andersen against a class action arbitration demand brought by two retired Andersen partners, arising from Andersen's handling of certain retirement benefits. Claiming that Federal has refused to meet this obligation, Andersen brings claims for declaratory judgment, breach of contract, and violation of the Illinois Insurance Code. Federal moves to dismiss Andersen's complaint as barred by res judicata and collateral estoppel, contending that Andersen is attempting to relitigate claims that went to trial in a previous lawsuit between the parties, concerning Federal's duty to defend Andersen against similar claim demands asserted in various forms by hundreds of retired Andersen partners. For the reasons set forth below, Federal's motion is granted in part and denied in part.


For purposes of a motion to dismiss, the court presumes the truth of all of the plaintiff's well-pleaded factual allegations. McMillan v. Collection Prof'ls, Inc., 455 F.3d 754, 758 (7th Cir. 2006). Although this ordinarily entails an examination merely of the allegations in the complaint, a court may also take judicial notice of matters in the public record, including pleadings and orders in previous cases. See Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir. 1997) (collecting cases); Opoka v. INS, 94 F.3d 392, 394 (7th Cir. 1996) (proceedings in other courts proper subject of judicial notice). In this case, as the basis for dismissal is res judicata, the court takes judicial notice of pleadings, orders, and trial transcripts from previous litigation between the parties, specifically Fed. Ins. Co. v. Arthur Andersen LLP, No. 03 C 1174 (N.D. Ill.) (St. Eve, J.) (hereinafter, "Andersen I").

A. Andersen's Claims Against Federal in the Present Action

Beginning in 2002, in the wake of Andersen's well-publicized difficulties following the collapse of Enron, see Andersen I, 2005 WL 1838440, at *3 (N.D. Ill. Aug. 2, 2005), Andersen began receiving claim demands from retired partners for lump sum payments of certain retirement benefits. (Compl. ¶ 13.) On June 17, 2005, two such retired partners, Paul W. Hoffman and Ronald C. Wade, filed a "Demand for Class Arbitration" (the "Hoffman Arbitration Demand") with the American Arbitration Association on behalf of themselves and all others similarly situated.*fn1 (Id. ¶ 14.) The Hoffman Arbitration Demand asserts, inter alia, that in late 2002, Andersen rescinded an agreement to pay to "retired partners or participating principals" a monthly stipend known as "Basic Retirement Benefits" ("BRB") and also suspended payment of certain "Early Retirement Benefits" ("ERB"). (Id. ¶ 15 (citing Hoffman Arbitration Demand ¶ 1).) Seeking a declaratory judgment with regard to certain aspects of Andersen's partnership agreement, the Hoffman Arbitration Demand makes numerous allegations pertaining to Andersen's responsibility for alleged breaches of fiduciary duty; in general, these allegations accuse active Andersen partners of enhancing their financial positions, post-Enron, at the expense of partnership assets and thus the interests of the retired partners. (Id. ¶ 16; Hoffman Arbitration Demand ¶¶ 17-18, 30-33.) Andersen acknowledges in its complaint that the Hoffman Arbitration Demand was "related to" the other claim demands received since 2002, which also sought lump sum payments of retirement benefits "purportedly based on Andersen's alleged past practice and exercise of discretion in the handling of such payouts and its past advice given in regard thereto." (Compl. ¶ 13.)

Andersen alleges that Federal has a duty to defend Andersen against the Hoffman Arbitration Demand and to indemnify Andersen against any potential loss, pursuant to Executive Protection Policy No. 8146-02-90B (the "Policy"), issued by Federal and effective at all times relevant to this litigation. (Id. ¶¶ 1, 7-10.) The Policy requires Federal to pay "on behalf of each of the Insureds all Loss for which the Insured becomes legally obligated to pay on account of any Claim . . . made against the Insured . . . for a Wrongful Act committed, attempted or allegedly committed or attempted . . . by an Insured or by any person for whose Wrongful Acts the Insured is legally responsible." (Id. ¶ 11 (quoting Policy § 1, Ex. A to Compl.).) Andersen is an "Insured" within the meaning of the Policy. (Id. ¶ 1.) The Policy further provides that Federal "shall have the right and duty to defend any Claim covered by this coverage section. . . . even if any of the allegations are groundless, false or fraudulent." (Id. ¶ 12 (quoting Policy § 3.).) "Loss" includes expenses for "Defense Costs"; "Claim" is defined in part as "a civil proceeding" made "against any Insured for a Wrongful Act"; and "Wrongful Act" is in turn defined as "any breach of the responsibilities, obligations or duties imposed upon fiduciaries" of certain employee benefit plans. (Id. (quoting Policy § 15).) According to Andersen, these provisions require Federal to "pay all costs, including attorneys' fees and supplemental expenses, incurred by [Andersen] in defense of claims for which [Federal] might incur a duty to indemnify . . . unless it is clear from the face of the underlying claim demands that no allegation states any fact or any theory which brings the claim demands within, or potentially within, the coverage of the Policy." (Id. ¶ 10 (emphasis in original).) Andersen alleges that the breaches of fiduciary duty asserted in the Hoffman Arbitration Demand constitute "Wrongful Acts" under the Policy, thus entitling Andersen to coverage. (Id. ¶ 17.)

On July 20, 2005, at a meeting between Andersen representatives and Federal's lead adjuster Greg Smith and Federal counsel, Andersen "gave Federal actual notice of the Hoffman Demand and Andersen's need for assistance with [its] defense . . . ." (Id. ¶ 18.) Andersen's "lead defense counsel . . . explained in detail the claims being pursued in the Hoffman Demand and the plans for defending them," and answered questions posed by Smith. (Id.) Andersen's counsel also forwarded a copy of the Hoffman Arbitration Demand to Federal. (Id.) In response, Andersen alleges, Federal "did nothing." (Id. ¶ 19.) Andersen contends that Illinois law required Federal to compare the allegations made against Andersen with the Policy provisions to determine the potential for coverage and inform Andersen accordingly; Andersen alleges that Federal failed even to undertake this duty-to-defend analysis, much less provide Andersen with an answer. Left to defend itself against the Hoffman Arbitration Demand on its own, Andersen "has incurred substantial legal fees and costs." (Id.)

Andersen further alleges that Federal's refusal to defend Andersen is contrary to (1) Federal's "own admissions of having a duty to defend against substantially similar claims made by other retired Andersen partners"; and (2) a partial judgment order in Andersen I, holding that the Policy "gave rise to a duty to defend substantially similar claims" to those presented in the Hoffman Arbitration Demand. (Id. ¶ 20.) The court discusses Andersen I below. Federal's alleged admissions are contained in a November 2002 letter from Smith to Andersen's general counsel regarding a separate class action lawsuit, also discussed below, in which Federal simply consented to Andersen's choice of counsel and agreed to defend under a reservation of rights. (Letter from Smith to Raimondo of November 27, 2002, Ex. C to Compl.)

Andersen brings a claim for declaratory judgment, seeking a declaration that Federal has a duty to defend the Hoffman Arbitration Demand and is therefore estopped to deny coverage under the Policy (Count I), (id. ¶ 26); a breach of contract claim seeking damages for defense costs incurred (Count II), (id. ¶ 32); and a claim under Section 155 of the Illinois Insurance Code, 215 ILCS 5/155, alleging that Federal acted "vexatiously and unreasonably" in refusing to defend Andersen, and seeking attorneys fees, costs, and statutory damages. (Id. ¶¶ 38-39.)

B. Proceedings in Andersen I

1. Pleadings and Pre-trial Rulings

As noted, the Hoffman Arbitration demand was not the first claim asserted by retired Andersen partners, nor is the present action the first litigation concerning Federal's duty to defend such claims. On March 18, 2003, Federal filed a declaratory judgment action (Andersen I), seeking a declaration that Federal did not owe a duty to defend or indemnify Andersen against claim demands brought by retired partners, of which Andersen notified Federal on or before September 27, 2002. (Andersen I First Am. Compl. ¶¶ 43, 50, 57, 62, 64-122, Ex. 1 to Arthur Andersen LLP's Memorandum in Opposition to Federal Insurance Company's Motion to Dismiss ("Pl.'s Resp.").) Specifically, these claim demands consisted of an arbitration demand filed by one retired partner (the "Samore Arbitration"), (id. ¶¶ 37-44); a California suit brought by three retired partners (the "Waters Action"), (id. ¶¶ 45-51); a class action suit in this district that plaintiffs voluntarily dismissed and then re-filed as an arbitration demand (the "Bryce Action"), (id. ¶¶ 52-58); and 214 letters from retired partners ("Election Letters") in which the retirees demanded immediate lump sum payments of certain retirement benefits. (Id. ¶¶ 59-63.) After Andersen gave Federal notice of additional claims, Federal amended its complaint to cover additional arbitration demands brought separately by three retired partners (the "Moriarty Arbitration", the "Connolly Arbitration", and the "Small Arbitration"), (Andersen I Second Am. Compl. ¶¶ 59-77, Ex. 3 to Pl.'s Resp.), as well as three more Election Letters. (Id. ¶¶ 78-82.)

Andersen answered on September 11, 2003, asserting counterclaims against Federal. As in the present action, Andersen brought claims for declaratory judgment, breach of contract, and violation of Section 155 of the Illinois Insurance Code, arising from Federal's alleged failure to defend the retired partners' claims.*fn2 (Andersen I Second Am. Compl. Countercl. ("Andersen I Countercl.") ¶¶ 27-44, Ex. 2 to Memorandum in Support of Federal Insurance Company's Motion to Dismiss ("Def.'s Mem.").) On March 1, 2004 Federal again amended its complaint to encompass two more arbitration demands (the "Powers Arbitration" and the "Tripp Arbitration"), (Andersen I Third Am. Compl. ¶¶ 78-92, Ex. 6 to Pl.'s Resp.), and Andersen likewise amended its answer and incorporated by reference its counterclaims to include the two additional arbitration demands. (Andersen I Answer to Third Am. Compl. ¶¶ 78-92, 167-92, Ex. 7 to Pl.'s Resp.) On May 18, 2004, Judge St. Eve granted Andersen's motion for partial judgment on the pleadings, holding that Federal owed Andersen a duty to defend the underlying claims because the claimants had alleged wrongful acts that were at least potentially within the scope of coverage under the Policy. (Andersen I Order of 5/18/2004 (77), Ex. D to Compl.) Both parties then filed motions for summary judgment on the remaining issues of whether Federal had breached that duty, whether certain Policy provisions operated to exclude coverage, and whether Federal was liable pursuant to Andersen's Illinois Insurance Code counterclaim; briefing concluded on May 18, 2005. See Andersen I, 2005 WL 1838440, at *10 n.14, 12-18.

As noted, Andersen received the Hoffman Arbitration Demand on June 17, 2005, and brought it to Federal's attention on July 20, 2005. (Compl. ¶¶ 14, 18.) Neither party amended their pleadings in Andersen I in response to the new claim. This was not, however, the first claim demand that Andersen had received from Hoffman and Wade: theirs were among the 217 Election Letters encompassed by the pleadings, and Andersen in fact included their letters in the exhibit of Election Letters attached to its counterclaims. (Letter from Hoffman to Gorrell and Cardoso of April 17, 2002, Ex. A to Andersen I Countercl., Ex. 2 to Def.'s Mem.; Letter from Wade to Gorrell and Cardoso of April 20, 2002, Ex. A to Andersen I Countercl., Ex. 2 to Def.'s Mem.) In their April 2002 letters, Hoffman and Wade requested immediate lump sum payments of their remaining ERB balances, but made no mention of monthly BRB payments, nor of any claims for breach of fiduciary duty, which they identified for the first time in the Hoffman Arbitration Demand. Instead, in their letters, both Hoffman and Wade based their demands solely on provisions of Andersen's partnership agreement. (Id.) Federal nevertheless emphasizes language from Andersen's counterclaims, particularly its statement that "claim demands had arrived in three interconnected forms: letters making demands and requests for immediate payment, class action lawsuits, and arbitration proceedings." (Andersen I Countercl. ¶ 13 (emphasis added).) Federal notes, further, Andersen's allegation that it had been served with a class action lawsuit and arbitration demands "in conjunction with" receipt of the Election Letters, (id. ¶ 17 (emphasis added)), and that "[a]side from their format, the underlying claim demands track one another." (Id. ¶ 14.)

On August 2, 2005, Judge St. Eve denied the parties' cross-motions for summary judgment, concluding, inter alia, that issues of material fact existed as to whether Federal had breached its duty to defend, whether the Policy nonetheless precluded coverage, and whether Federal had engaged in "vexatious and unreasonable" conduct for purposes of Andersen's Illinois Insurance Code counterclaim. Andersen I, 2005 WL 1838440, at *12-18. On January 3, 2006, the court granted Federal's motion to bifurcate for trial the issues related to Federal's duty to defend from the court's separate resolution of the Illinois claim, which required decision by the court rather than by the jury.*fn3 (Andersen I Order of 1/03/2006 (196).) On January 25, 2006, ruling on Andersen's motion to clarify the burden of proof at trial, the court held that Andersen bore the burden of proving that Federal breached its duty to defend; but if Andersen did so, Federal could defeat the claim by proving that Andersen relieved Federal of that duty by "being unresponsive and uncooperative to Federal's requests." (Andersen I Order of 1/25/2006 (226), Ex. 3 to Def.'s Mem., at 3.)

In the meantime, on December 19, 2005, Andersen had received yet another class action arbitration demand (the "Huelsmann Arbitration"), and had notified Federal of the claim on December 21, 2005. Federal filed a separate declaratory judgment action regarding the Huelsmann Arbitration on January 25, 2006, which is pending before this court. See Federal Ins. Co. v. Arthur Andersen LLP, No. 06 C 462 (N.D. Ill. filed Jan. 25, 2006).

2. Trial Proceedings

Andersen I proceeded to trial on February 21, 2006. In Andersen's opening statement, its counsel specifically referred to the Hoffman Arbitration Demand:

I'll fast forward to 2005. Andersen and [co-defendant's] counsel sat down with [Federal lead adjuster] Smith in a face-to-face meeting; told him about a Hoffman class arbitration demand: "Any questions? We'll explain whatever you want." Within a week or two, all these pleadings come, they're given to Mr. Smith. Now, he's got a chance to do a comparison test. Did he do what he said: Make that call? Compare the two-the allegations-and make that call? We're here on trial in February, 2006. We still haven't had a response from Mr. Smith. (Andersen I Tr. at 48:7-17 (2/21/06), Ex. 4 to Def.'s Mem.) Counsel returned to the subject shortly thereafter:

And this Hoffman arbitration we talked about, we're still sitting here today. There's still no response from Mr. Smith. We're still waiting on that one. You're going to have to ask yourself: Did Federal really want to help Andersen-really want to defend?

The Answer is pretty clear: No, it didn't. It breached. (Id. at 51:13-19.) Federal did not object to these statements.

Andersen also referred to the Hoffman Arbitration Demand in a series of demonstrative slides accompanying its opening statement. Four slides contained the identical heading "Did Federal Compare the Allegations to the Policy and 'MAKE THAT CALL?'"*fn4 Beneath this, Andersen listed Federal's receipt of underlying claims, organized under month/year headings, with the word "No" after each claim listed, along with a "check" in a box labeled "Breach." (Andersen I Demonstrative Slides, Ex. 5 to Def.'s Mem.) The first slide listed the Bryce Action (in its original lawsuit form), submitted in May 2002; the second listed the Bryce Action (resubmitted as an arbitration demand), the Samore Arbitration, the Waters Action, and "Over 200 Demand Letters", submitted in September 2002; the third listed the Viets, Connolly, Moriarty, and Small Arbitrations, and "Over 200 Demand Letters Resubmitted" in March 2003; and the fourth listed the July 2005 Hoffman Arbitration Demand. ...

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