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ACE American Ins. Co. v. Sandberg, Phoenix & Von Gontard, PC.

United States District Court, S.D. Illinois

October 2, 2012

ACE AMERICAN INSURANCE CO., and Federal Insurance Co., Plaintiffs,
SANDBERG, PHOENIX & VON GONTARD, PC., G. Keith Phoenix, and W. Wylie Blair, Defendants.

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[Copyrighted Material Omitted]

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Brian P. Flaherty, Stephen A. Cozen, Thomas G. Wilkinson, Jr., Cozen & O'Connor, Philadelphia, PA, Kevin P. Caraher, Tia C. Ghattas, Cozen O'Connor, Chicago, IL, for Plaintiffs.

Geoffrey A. Belzer, Michael P. Tone, Wilson Elser et al., Chicago, IL, Michael L. Young, Theodore J. MacDonald, Jr., Heplerbroom LLC, St. Louis, IL, for Defendants.


REAGAN, District Judge:

A. Procedural Overview

Six months ago, two insurance companies filed a legal malpractice suit in this Court against a law firm (Sandberg, Phoenix and Von Gontard, P.C.) and two lawyers from the firm (Keith Phoenix and Wylie Blair). The complaint alleged that ACE American Insurance Company and Federal Insurance Company issued liability insurance policies to Safariland, LLC, that Safariland was the named defendant in a state court products liability/negligence action ( Brough v. Safariland, et al., St. Clair County Circuit Court Case No. 07-L-0358), that the firm and lawyers botched the defense of the state court suit, and that this resulted in ACE and Federal being forced to pay inflated sums to settle the suit just prior to trial. ACE and Federal now seek to recover from the firm and the lawyers the full amount of the settlement the insurers paid on Safariland's behalf, plus legal expenses relating to the state court case and other damages. This recovery is sought via various theories of subrogation, as well as a direct claim for legal malpractice.

Plaintiffs filed an amended complaint here on June 7, 2012, after which the undersigned District Judge verified that subject matter jurisdiction lies under the diversity statute, 28 U.S.C. 1332. Defendants (the firm and the lawyers) responded to the amended complaint with a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). That motion was fully briefed on August 9, 2012. For the reasons stated below, the Court denies the dismissal motion. Analysis begins with a summary of the key undisputed facts and the applicable legal standards.

B. Summary of Key Facts and Allegations

Armor Holdings, Inc. was the predecessor in interest to Safariland, LLC. Federal Insurance Company issued a primary Commercial General Liability insurance policy to Armor (the " Federal primary policy" ), effective April 1, 2006 to April 1, 2007. Federal also issued a Commercial Excess and Umbrella Liability insurance policy to Armor (the " Federal excess/umbrella policy" ), effective April 1, 2006 to

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April 1, 2007. ACE Insurance Company issued an Excess Liability Catastrophe policy to Armor (the " ACE excess policy" ), effective April 1, 2006 to April 1, 2007. Safariland is the successor in interest to Armor. The amended complaint alleges that Safariland qualifies as an insured under all three policies.

The Federal primary policy provided limits of $1 million per occurrence, after a $1 million self-insured retention. The Federal excess/umbrella policy provided limits of $5 million per occurrence. The ACE excess policy provided limits of $20 million per occurrence. The policy coverages have been summarized as follows ( see Doc. 23, pp. 2-3):

$1-$ 1,000,000 Safariland SIR

$1,000,001-$ 2,000,000 Federal CGL [" primary" ] Policy

$2,000,001-$ 7,000,000 Federal Excess and Umbrella Policy

$7,000,001-$27,000,000 ACE Excess Liability Catastrophe Policy.

In this Court, Federal and ACE allege that Sandberg, Phoenix and Von Gontard, Keith Phoenix, and Wylie Blair (collectively, " Phoenix" ) negligently defended Safariland and its predecessor and related entities (collectively, " Safariland" ) in Brough v. Safariland, et al. (" the Brough case" ). The Brough case arose from the disabling injuries sustained by a Belleville, Illinois police sergeant (Jon Brough) who was shot in the face on November 10, 2006, during a tactical team dynamic entry into a local residence to apprehend a fugitive. Safariland allegedly manufactured and sold the ballistic shield and flash-bang stun grenades used by Sergeant Brough and his fellow officers in the entry. Brough and his wife sued in state court, seeking to hold Safariland liable.

The state court litigation was long and extensive. Filed in July 2007, the Brough case was scheduled to start trial on August 22, 2011 but culminated in a settlement right after the trial court judge (1) determined that defense counsel deliberately had failed to disclose responsive documents in discovery and (2) issued a sanctions order finding flagrant violations by defendants and striking their pleadings. The sanctions order established liability and left Safariland with the choice of proceeding to trial on damages or settling the case.

The August 2011 sanctions order, as amended on October 28, 2011, stated (Doc. 19-1, emphasis in original):

Based solely on the evidence presented in open court, the Court finds that the discovery violations committed by defense counsel requires [sic] the Court to impose a sanction under Supreme Court Rule 219.
The Court finds it disappointing that in the face of all the evidence defense counsel still argues that their flagrant violations fall short of sanctionable conduct. Additionally, the Court finds defense counsel's answers to these discovery violations totally unsatisfactory.
It is the responsibility of the Court to confront these violations without hesitation and to impose a sanction proportionate to the violations and NOT TO PUNISH. The discovery violations committed by defense counsel were not mere delays or insignificant mistakes that occurred inadvertently but rather deliberate or systematic conduct. Their violations undermine the entire system. Their actions showed a pronounced disregard of the Court's authority because they believe that they and they alone decide discovery matters. These violations cannot be cured and they have deprived Wendy and Jon Brough of a fair trial.

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The striking of pleadings is to be granted only in the most egregious and systematic, deliberate or intentional discovery violations. This Court has never granted such a motion in its seventeen year tenure ... but justice requires the Court to strike the defendant's pleadings. Defense counsel's misconduct is binding on their client. As difficult as a decision as this has been, the Court believes the ruling is just.

In the case at bar, Federal and ACE (" Plaintiffs" ) allege that the above-quoted order exponentially increased the potential verdict of any damages-only trial, drove up the value of the Brough case, and resulted in a negotiated settlement of a substantial amount (the public disclosure of which is prohibited under a confidentiality provision of the settlement agreement). Plaintiffs look to recover what they spent in the Brough case on the grounds that Phoenix owed Safariland duties of reasonable care and professional competence, that Phoenix breached those duties, that the malpractice resulted in payments of large sums of money by Federal and ACE to settle the Brough case, that Plaintiffs are the subrogees of Safariland's claims against Phoenix, and that Plaintiffs are subrogated to Safariland's rights of recovery from Phoenix. Federal also presents a direct claim of legal malpractice on the theory that, as the defending primary insurer of Safariland, Federal was a " client" of Phoenix for the Brough case, and Phoenix violated its professional obligations and duty of care owed to both Safariland and Federal.

Phoenix moves to dismiss the amended complaint on four grounds:

(1) Plaintiffs have failed to establish a contractual right to assert Safariland's claims against Phoenix;
(2) ACE, as an excess insurer, lacks standing to pursue an equitable subrogation claim against Phoenix;
(3) Federal, as an umbrella insurer, lacks standing to pursue an equitable subrogation claim against Phoenix; [1] and
(4) Federal (as " a purported primary insurer" ) has not asserted facts supporting a direct legal malpractice claim under Missouri (or Illinois) law (Doc. 23, pp. 1-2).

C. Applicable Legal Standards

Federal Rule of Civil Procedure 12(b)(6) governs motions to dismiss for failure to state a claim. In deciding a 12(b)(6) motion, the district court's task is to determine whether the complaint includes " enough facts to state a claim to relief that is plausible on its face." Khorrami v. Rolince, 539 F.3d 782, 788 (7th Cir.2008), quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A complaint need not contain detailed factual allegations to meet this standard; but it must " go beyond mere labels and conclusions" and contain " enough to raise a right to relief above the speculative level." G & S Holdings, LLC v. Continental Cas. Co., 697 F.3d 534 (7th Cir.2012), citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955. See also Ashcroft v. Iqbal, 556 U.S. 662, 663-64, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

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" Even after Twombly, courts must still approach motions under Rule 12(b)(6) by ‘ construing the complaint in the light most favorable to the plaintiff, accepting as true all well-pleaded facts alleged, and drawing all possible inferences in her favor.’ " Hecker v. Deere & Co., 556 F.3d 575, 580 (7th Cir.2009), cert. denied, 558 U.S. 1148, 130 S.Ct. 1141, 175 L.Ed.2d 973 (2010), quoting Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir.2008).

The Seventh Circuit further has pointed out:

Iqbal clarified two working principles underlying the Twombly decision. First, although the complaint's factual allegations are accepted as true at the pleading stage, allegations in the form of legal conclusions are insufficient to survive a Rule 12(b)(6) motion. Id. Accordingly, " [t]hreadbare recitals of the elements of the cause of action, supported by mere conclusory statements, do not suffice." Id. Second, the plausibility standard calls for a " context-specific" inquiry that requires the court " to draw on its judicial experience and common sense." Id. at 679, 129 S.Ct. 1937.

McReynolds v. Merrill Lynch & Co., Inc., 694 F.3d 873, 885 (7th Cir.2012).

So, in the instant case, this Court reviews the amended complaint, taking as true all well-pled factual allegations. After excising the allegations not accepted as true (legal conclusions), the Court must decide whether the remaining factual allegations plausibly suggest that ACE and Federal are entitled to relief. McCauley v. City of Chicago, 671 F.3d 611, 616 (7th Cir.2011).

Finally, a Rule 12(b)(6) dismissal motion " must be decided solely on the face of the complaint and any attachments that accompanied its filing." Miller v. Herman, 600 F.3d 726, 733 (7th Cir.2010), citing FED. R. CIV. P. 10(c) and Segal v. Geisha NYC LLC, 517 F.3d 501, 504-05 (7th Cir.2008). If, on a Rule 12(b)(6) motion, matters outside the pleadings are presented to (and not excluded by) the court, the motion must be treated as a Rule 56 motion for summary judgment. General Insurance Co. of America v. Clark Mall Corp., 644 F.3d 375, 378 (7th Cir.2011); FED. R. CIV. P. 12(d). That means the court must notify the parties that it will consider the additional matters and provide a reasonable opportunity for the parties to present all materials pertinent to the motion, so construed. Doss v. Clearwater Title Co., 551 F.3d 634, 639-40 (7th Cir.2008). See also Santana v. Cook County Bd. of Review, 679 F.3d 614 (7th Cir.2012). Of course, documents attached to the complaint and central to the claims are ...

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