Sims, Daniel v. EGA Products Inc ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 06-1057 & 06-1268
DANIEL SIMS and ANDREA SIMS,
Plaintiffs-Appellants,
v.
EGA PRODUCTS, INC.,
Defendant-Appellee.
MEADOWBROOK RISK MANAGEMENT, LTD.,
Potential Intervenor-Appellant.
____________
Appeals from the United States District Court for the
Northern District of Indiana, Hammond Division.
No. 2:02-CV-187 PS—Philip P. Simon, Judge.
____________
ARGUED DECEMBER 4, 2006—DECIDED JANUARY 24, 2007
____________
Before EASTERBROOK, Chief Judge, and CUDAHY and
SYKES, Circuit Judges.
EASTERBROOK, Chief Judge. Daniel Sims fell from a lift
platform made by EGA Products and was seriously
injured. Contending that the platform was defective,
Daniel and his wife Andrea filed this tort litigation
under the diversity jurisdiction. After being served with
process, EGA sent the papers to Meadowbrook Risk
Management, which superintends EGA’s insurance
coverage. EGA anticipated that Meadowbrook would
2 Nos. 06-1057 & 06-1268
arrange for a defense, as the policy provides. North
American Manufacturers Insurance Co. issued the policy;
EGA deals with the insurer through Meadowbrook, which
in the past had obtained counsel on behalf of both
insurer and insured. After receiving notice, however,
Meadowbrook did—nothing. It did not notify the insurer,
did not engage counsel to represent EGA, and did not
alert EGA to the need to protect its own interests;
Meadowbrook just sat on its hands. Because no one filed
an answer on EGA’s behalf, the district court’s clerk
entered a default. Alerted to this by EGA, Meadowbrook’s
inactivity continued. When a magistrate judge recom-
mended that plaintiffs receive $31.2 million in damages,
EGA hired its own lawyer to see whether the situation
could be salvaged.
Five months after its answer to the complaint had been
due, EGA filed a motion to vacate the default, see Fed. R.
Civ. P. 55(c), blaming Meadowbrook for the earlier inac-
tion. The magistrate judge recommended that this mo-
tion be denied, observing that the best way to give
Meadowbrook an incentive to take care is to amerce EGA,
which could shift the expense to Meadowbrook. But the
district judge concluded that the injury attributable to
Meadowbrook’s neglect is much less than $31 million,
making the proposed award disproportionate to the
wrong. In the judge’s view, the lack of correspondence
between EGA’s limited fault and the $31 million award
was “good cause” for reopening the case. The judge thus
set aside the default, while holding open the possibility
that a more appropriate sanction might be in order.
After discovery had been completed, a settlement was
implemented via an offer of judgment under Fed. R. Civ.
P. 68. The settlement provides that North American
Manufacturers Insurance will pay the Simses the full
amount remaining on EGA’s policy, some $761,000.
Plaintiffs reserve the right to appeal the question whether
Nos. 06-1057 & 06-1268 3
the default should have been set aside; the settlement
provides that, if we reverse the district judge on this
question and reinstate the default, then EGA would try
to recoup any award in excess of $761,000 from Meadow-
brook. (An order requiring the district court to reinstate
the default would leave damages open, for the district
judge did not rule on the magistrate judge’s recommenda-
tion to award $31.2 million.) Finally, “in the event that
the Court of Appeals declines to rule for any reason on
all issues concerning [the default judgment], . . . the
parties are placed back into the same position they were
in prior to [this settlement], i.e. awaiting trial in the
district court”.
Meadowbrook, having done nothing to protect its client
EGA, decided to protect itself by intervening in the tort
litigation. It opposed the settlement, arguing that the
possibility of a $31 million award would cause it economic
injury. One of its arguments was that Rule 68 had not
been used properly. Rule 68 is designed to shift costs to a
litigant who refuses a proper offer; here the offer was
accepted, and how the parties got to “yes” is beside the
point. But if Meadowbrook became a party, it could
block the settlement by withholding its own assent. The
district judge denied the motion to intervene, however,
observing that Meadowbrook’s liability, if any, could be
addressed in a follow-on action if this court should
reverse and a $31 million judgment ensue. Judgment
was entered incorporating the terms of the Rule 68 offer.
Both the Simses and Meadowbrook have appealed—and
Meadowbrook leads with the argument that we should
dismiss the Simses’ appeal for want of jurisdiction. If
that happens, then the case will be tried on the merits
in the district court. Meadowbrook apparently thinks
that this would let it off the hook, but that’s not so. If
EGA were to prevail on the merits, or the Simses were to
win less than $31 million, they could appeal from the final
4 Nos. 06-1057 & 06-1268
decision and ask that the default be reinstated and the
magistrate judge’s recommendation about damages be
turned into a judgment. No matter. Jurisdiction is an
appellate court’s first order of business even if the per-
son who had raised the question disserves his own inter-
ests, indeed even if no one has raised the question.
We have jurisdiction only if the judgment based on the
settlement is a “final decision.” 28 U.S.C. §1291. This
judgment leaves an issue to be resolved on appeal—but
so does a conditional plea under Fed. R. Crim. P. 11(a)(2)
that reserves an issue for appellate decision. Courts
regularly entertain disputes from such dispositions
without doubting their finality. A settlement that reserves
an issue for appeal is final not only because it com-
pletely resolves the litigation if no appeal ensues, but
also because an affirmance leaves that disposition in
place. No further litigation will occur. The civil rules lack
a provision comparable to Rule 11(a)(2) of the criminal
rules, but this does not affect jurisdiction. So we held
in Downey v. State Farm Fire & Casualty Co., 266 F.3d
675, 682-83 (7th Cir. 2001), when taking jurisdiction of
an appeal from a judgment based on a conditional settle-
ment in a civil case.
Does the settlement’s provision that the litigation
resumes if we refuse to take jurisdiction alter matters? Not
at all. We read this provision to say no more than that,
if we think the decision not final, then it must be not
final and the litigation must continue. The same proviso
is implied in a conditional plea under Rule 11(a)(2); if
resolving the reserved issue on appeal is impossible, then
the plea must be set aside and the prosecution continue.
What is implied under Rule 11(a)(2) has been made
explicit in this judgment.
Meadowbrook invokes a line of decisions exemplified by
Horwitz v. Alloy Automotive Co., 957 F.2d 1431 (7th Cir.
Nos. 06-1057 & 06-1268 5
1992). Many civil litigants would like to have interlocutory
appellate resolution of some important issue. But when
the issue does not meet the standard for certification
under 28 U.S.C. §1292(b), and it is not feasible to enter
judgment with respect to a separate claim or party under
Fed. R. Civ. P. 54(b), it is not possible to obtain an appel-
late decision until the case is over. Crafty litigants thought
that they could evade the limits on interlocutory review
by asking the district judge to dismiss the suit with
leave to reinstate once an appeal had been resolved. Then
they argued that nothing remained pending in the district
court to spoil the “finality” of the decision. Horwitz and
its successors refuse to go along with that ploy, because
the rest of the litigation remains in the background, ready
to resume as soon as the appeal ends. In evaluating
“finality,” we held in Horwitz, it is essential to look at
the whole picture, including claims that have been put
on the back burner through a dismissal-with-leave-to-
reinstate procedure.
Nothing in this case has been dismissed with leave to
reinstate, however. Nobody is trying to pull a fast one. If
we affirm, the case is over and the Simses receive
$761,000. If we reverse, the default is reinstated (avoid-
ing any dispute about liability) and the Simses will be
entitled to an award of damages that may be sub-
stantially higher. Only if we refuse to decide does the
case go to trial on the merits. That’s just what should
happen, because the only way we can refuse to act is if
the judgment isn’t final, and then the case must still
be ongoing. The gimmick that prevented an appeal in
Horwitz—that the litigation would continue no matter
what happened on appeal—has not been reused. So the
decision is final and appealable. We shall decide the
question presented, and proceedings will be over.
A default judgment is a sanction for misconduct during
the litigation. Appellate review of decisions to impose, or
6 Nos. 06-1057 & 06-1268
withhold, sanctions is deferential. See, e.g., Cooter & Gell
v. Hartmarx Corp., 496 U.S. 384, 399-400 (1990); National
Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S.
639 (1976); Pretzel & Stouffer v. Imperial Adjusters, Inc.,
28 F.3d 42, 45 (7th Cir. 1994). That standard of review
pretty much resolves this appeal, for it would be unimagin-
able to label as an abuse of discretion a district judge’s
decision that some sanction less than $31 million is
appropriate for a wrong that apparently caused no preju-
dice to the adverse party. See Mommaerts v. Hartford
Life & Accident Insurance Co., No. 06-2952 (7th Cir. Jan.
8, 2007). Cf. United States v. McLaughlin, 470 F.3d 698(7th Cir. 2006).
Defaults may be set aside for “good cause”. Damages
disproportionate to the wrong afford good cause for judicial
action, even though there is no good excuse for the defen-
dant’s inattention to the case. Rule 55(c) requires “good
cause” for the judicial action, not “good cause” for the
defendant’s error; as used in this Rule, the phrase is not
a synonym for “excusable neglect.” See Renfield v. Conti-
nental Casualty Corp., 818 F.2d 586, 601 (7th Cir. 1987).
(Another way to see this is that Rule 55(c) uses the “good
cause” standard for relief before judgment has been
entered, while referring to the standard under Rule 60(b)
for relief after judgment. Rule 60(b) allows relief on
account of mistake and inadvertence in addition to excus-
able neglect; the “good cause” standard in Rule 55(c)
must be easier to satisfy.)
In Degen v. United States, 517 U.S. 820 (1996), the
Supreme Court held it abuse of discretion to default a
litigant in a $5.5 million civil suit for wilful failure to
appear in court, given the availability of lesser sanctions.
(The litigant was a fugitive in a criminal prosecution.)
Likewise a $31 million sanction would be excessive in
this suit: EGA’s misconduct was negligent (reckless at
Nos. 06-1057 & 06-1268 7
worst) rather than deliberate, and the injury (if any) to
its adversary was negligible. Like damages in civil litiga-
tion, the sanction should fit the offense. That’s a major
reason why district judges should not enter defaults
precipitately. See, e.g., Bleitner v. Welborn, 15 F.3d 652(7th Cir. 1994); Philips Medical Systems International
B.V. v. Bruetman, 8 F.3d 600 (7th Cir. 1993); cf. Ball v.
Chicago, 2 F.3d 752 (7th Cir. 1993).
Our point is not that EGA should be let off easy be-
cause Meadowbrook is principally responsible. A litigant
bears the consequences of errors by its chosen agent. See,
e.g., Pioneer Investment Services Co. v. Brunswick Associ-
ates L.P., 507 U.S. 380, 396-97 (1993); United States v.
7108 West Grand Avenue, 15 F.3d 632 (7th Cir. 1994). Cf.
United States v. Boyle, 469 U.S. 241 (1985). Penalizing the
litigant, who can shift costs to the agent in turn, is the
best way to ensure that the agent takes adequate care. So
we proceed as if all fault is imputed to EGA. Nor do we
imply that defendants in multi-million-dollar cases may
treat the proceedings as nuisance litigation; a firm in
EGA’s position should invest more in the oversight of
its insurer when the plaintiff demands $10 million than
when the ad damnum is $100,000.
Still, delay that imposes slight injury does not call for
multi-million-dollar awards. EGA’s errors in managing
its defense of this litigation did not cause Daniel Sims to
fall on his head; that is the source of the $31 million loss
(if the magistrate judge estimated the damages correctly).
What EGA did (better, neglected to do) extended this
suit by a few months and perhaps caused the Simses
some anxiety and marginal legal expenses. A court can
compensate aggrieved litigants for such losses directly;
the district judge here did not abuse his discretion in
concluding that entry of default would be overkill.
Note that we have referred to the district judge’s discre-
tion, not the magistrate judge’s. Even if we suppose, as
8 Nos. 06-1057 & 06-1268
the Simses contend, that the magistrate judge could
have resolved this issue under Fed. R. Civ. P. 72(a)—which
seems unlikely, for default concludes the merits, while
Rule 72(a) covers only “nondispositive matters”—a district
court is not obliged to give magistrate judges the maxi-
mum authority such a non-Article-III officer may wield.
The litigants did not consent to final decision by a magis-
trate judge, see 28 U.S.C. §636(c), so the district judge
remained in charge and was entitled to make an independ-
ent decision, which he did.
Because the district judge’s decision to set aside the
default was not an abuse of discretion, the Simses will
receive $761,000, and Meadowbrook is not at risk of an
excess judgment. There is no remaining litigation into
which it could intervene. For what it is worth, however, we
think that the district judge acted sensibly in denying
the motion to intervene. Third-party liability is best
handled in third-party actions. Allowing Meadowbrook to
intervene would make no more sense than allowing
lawyers to intervene as parties whenever some question
about the competence of their work is raised. Just as those
questions should be resolved in separate malpractice
actions, disputes about insurers’ (or insurance agents’)
liability belong in separate litigation.
AFFIRMED
CUDAHY, Circuit Judge, concurring. I agree completely
with the majority, but write separately to comment in
greater detail on what I think is an important aspect of
the confusing issue of appellate jurisdiction. The consent
judgment here specified that in the event that we “decline
to rule for any reason on all of the issues concerning” the
Nos. 06-1057 & 06-1268 9
judgment (presumably because we hold that the order
is nonfinal and dismiss the appeal),1 then all of the par-
ties’ claims and defenses “reignite”: the order “will be
considered void and unenforceable . . . and the parties are
placed back into the same position they were in prior to
entering this offer of judgment.” In this way, the judgment
permits the parties to test without risk whether the
order is an appealable “final decision[ ],” 28 U.S.C. § 1291,
that is, without committing themselves to any conse-
quences if we determine that it is not.
Superficially, such a disposition might seem similar to
the nonfinal orders discussed in the majority opinion,
which are characterized by parties attempting to test
parts of their case on appeal without risking con-
sequences involving other parts of their case. See Majority
Op. at 4-5, citing Horwitz v. Alloy Automotive Co., 957 F.2d
1431 (7th Cir. 1992). Orders are not final unless they
leave nothing for the district court to do (absent what-
ever is called for by reversal on appeal or by the applica-
tion of Rule 59(e) or 60). Green Tree Fin. Corp. v.
Randolph, 531 U.S. 79, 86 (2000). Consequently, a consent
order is not final unless the parties “gamble” by “stak[ing]
the[ir] entire case” on the outcome of the appeal from it.
First Health Group Corp. v. BCE Emergis Corp., 269 F.3d
800, 801-02 (7th Cir. 2001). Attempting to provide for
more litigation in the event of reversal than the holding
on appeal calls for renders the order nonfinal. See Union
1
Other situations, such as an untimely appeal, might have
triggered the reignition provision as well. However, because
those situations can no longer arise, they are irrelevant and we
need not address them. See First Health Group Corp. v. BCE
Emergis Corp., 269 F.3d 800, 802 (7th Cir. 2001) (holding that
a party’s waiver of a right to pursue claims that had been
dismissed without prejudice cured any jurisdictional defect).
10 Nos. 06-1057 & 06-1268
Oil Co. of Cal. v. John Brown E & C (Unocal), 121 F.3d
305 (7th Cir. 1997).
As the majority points out, what distinguishes from
cases such as Horwitz the parties’ present attempt to
risklessly test appellate jurisdiction is that whether an
order purporting to resolve a case is final is not itself
part of the case; obviously appellate jurisdiction is not an
issue before the district court. The present case involves
the Sims’ product liability claims against EGA, and the
consent judgment definitively resolved them. The out-
come will be altered and the litigation will reignite in
the event that we find we lack jurisdiction. While modifica-
tion of a final order is strictly circumscribed, see Fed. R.
Civ. P. 59(e) & 60, nonfinal orders are generally modifi-
able, see, e.g., Fed. R. Civ. P. 54(b) (“[T]he order or other
form of decision is subject to revision at any time before
the entry of judgment adjudicating all the claims and
the rights and liabilities of all the parties.”). If the
reignition provision were to be activated, it would be
perfectly supported by our holding of finality, rather than
at war with it. See Majority Op. at 4 (“[I]f we think the
decision not final, it must be not final and the litigation
must continue.”).
By limiting appealable orders, 28 U.S.C. § 1291 serves,
among other things, to promote efficient judicial adminis-
tration and conserve scarce judicial resources. Cunning-
ham v. Hamilton County, 527 U.S. 198, 204 (1999);
Cobbledick v. United States, 309 U.S. 323, 325 (1940);
Unocal, 121 F.3d at 310. But “efficient judicial administra-
tion” is not synonymous with “forbidding as many ap-
peals as possible.” Permitting parties to risklessly test
appellate jurisdiction may encourage some improper
appeals from nonfinal judgments, but in other cases, such
as this one (where an order is clearly appealable absent
the provision allowing for reignition), allowing the test
will hasten final resolution.
Nos. 06-1057 & 06-1268 11
At any rate, Congress has made its determination as
to which appeals will best promote efficient adjudication;
it has prescribed appeals from “final decisions.” Decisions
are final, appropriately enough, if they end litigation in
the district court, leaving it nothing more to do. Appellate
jurisdiction is not an issue before the district court, and
the provisions of the judgment triggered by lack of ap-
pellate jurisdiction give the district court no task to
perform. The consent judgment here is therefore final
and appealable.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—1-24-07