Wilder Corporation of Delaware v. Thompson Drainage and Levee Di ( 2011 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-1185
W ILDER C ORPORATION OF D ELAWARE,
Plaintiff-Appellant,
v.
T HOMPSON D RAINAGE AND L EVEE D ISTRICT,
Defendant-Appellee.
Appeal from the United States District Court
for the Central District of Illinois.
No. 1:09-cv-01322-MMM-JAG— Michael M. Mihm, Judge.
A RGUED S EPTEMBER 7, 2011—D ECIDED S EPTEMBER 27, 2011
Before P OSNER, FLAUM, and H AMILTON, Circuit Judges.
P OSNER, Circuit Judge. This appeal from the grant of
summary judgment to the defendant in a diversity suit
governed by Illinois law tests the outer limits of the
common law doctrine of indemnity.
The word “indemnity” is from a Latin word that means
“security from damage.” The most common form
of indemnity in modern life is an insurance contract: A
is harmed by conduct covered by an insurance contract
issued by insurance company B; the contract secures
2 No. 11-1185
A from the harm by shifting its cost to B. But indemnity
is not limited to insurance contracts (indemnity provisions
are frequently found in other contracts, as in HK Systems,
Inc. v. Eaton Corp., 553 F.3d 1086 (7th Cir. 2009))— or, more
to the point, to contracts, period. For there is a tort doc-
trine of indemnity, which shifts the burden of liability from
a blameless tortfeasor (which sounds like an oxymoron,
but we’re about to see that it isn’t) to a blameworthy one.
American National Bank & Trust Co. v. Columbus-Cuneo-
Cabrini Medical Center, 609 N.E.2d 285, 287-88 (Ill.
1992); Frazer v. A.F. Munsterman, Inc., 527 N.E.2d
1248, 1251-52 (Ill. 1988); Schulson v. D’Ancona & Pflaum
LLC, 821 N.E.2d 643, 647 (Ill. App. 2004); Restatement
(Second) of Torts § 886B (1979). The tort doctrine is some-
times called “implied indemnity” to distinguish it
from contractual indemnity, but a clearer term is
“noncontractual indemnity.”
To illustrate: an employee, acting within the scope of his
employment (whether or not with the authorization, or to
the benefit, of his employer) negligently injures a person.
The victim sues the employer, the employer being strictly
liable for the employee's tort under the doctrine of
respondeat superior. After paying a judgment to, or
settling with, the victim, the employer, being itself blame-
less (respondeat superior is as we just said a doctrine of
strict liability) turns around and sues the employee to
recover the cost of the judgment or settlement, the em-
ployee being liable to the employer for that cost under the
doctrine of noncontractual indemnity. This may seem a
roundabout alternative to a rule that only the employee is
liable. But it is more than that. The employee often will be
No. 11-1185 3
judgment-proof. In that event the employer won’t be able
to shift its liability to him, and so the employee will be
underdeterred, to the detriment of the employer, whom
respondeat superior will stick with liability for the em-
ployee’s tort. This prospect gives an employer an incentive
to try to prevent its employees from committing torts. The
employer may screen applicants for employment more
carefully, or monitor their performance at work more
carefully, than it would do had it no back-up liability for its
employees’ torts. Sullivan v. Freeman, 944 F.2d 334, 336 (7th
Cir. 1991); Restatement (Third) of Agency § 2.04 comment b
(2006); Alan O. Sykes, “The Boundaries of Vicarious
Liability: An Economic Analysis of the Scope of Employ-
ment Rule and Related Legal Doctrines,” 101 Harv. L. Rev.
563, 569-70 (1988). Or it might try to reduce the number of
negligent injuries inflicted by its employees by reducing
the scale or scope of its activity; a reduction in output is
one way of reducing potential tort liability. Konradi v.
United States, 919 F.2d 1207, 1210 (7th Cir. 1990).
The twist in this case is that the party seeking indemnity
(the plaintiff, Wilder) is trying to shift liability not for a tort
but for a breach of contract.
Wilder owned 6600 acres of farmland, on which it grazed
cattle, in Fulton County, southwest of Peoria; Fulton is a
rural county bounded by the Illinois River. In 2000 Wilder
sold the land for $16.35 million to The Nature Conser-
vancy, the well-known environmental organization, which
wanted to restore Wilder’s land to its pre-twentieth
century condition as an ecologically functional floodplain
(that is, land adjacent to a body of water, in this case
4 No. 11-1185
the Illinois River, that overflows from time to time, soaking
the land, creating wetlands that preserve biodiversity).
The Conservancy claims that its restoration project is
one of the largest such projects in the United States. The
Nature Conservancy, “Illinois: Emiquon,”
www.nature.org/ourinitiatives/regions/northamerica/uni
tedstates/illinois/placesweprotect/emiquon.xml (visited
Sept. 11, 2011). (What had been Wilder’s land now consti-
tutes more than half of Emiquon Natural Wildlife Refuge.)
Wilder expressly warranted in the contract of sale
that there was no contamination of the land by petroleum.
But the land was contaminated by petroleum, though
there is no indication that Wilder knew this and we’ll
assume it didn’t.
Six years later the Conservancy, having discovered the
contamination, sued Wilder in an Illinois state court for
breach of warranty. The federal district court to which
Wilder removed the case (the parties being of diverse
citizenship) gave judgment for the Conservancy, awarding
it some $800,000 in damages, though some of this amount
reflected a separate breach of Wilder’s contract with the
Conservancy — its failure to clean up “sewage lagoons” in
which it had deposited waste generated by its cattle.
Wilder appealed the judgment, unsuccessfully. See
Nature Conservancy v. Wilder Corp. of Delaware, No. 09-2988,
2011 WL 3849627 (7th Cir. Sept. 1, 2011). It had already
brought the present suit, a companion suit, against
the local drainage district. Illinois drainage districts
are public corporations directed and empowered to
minimize damage from the overflow of waters that collect
No. 11-1185 5
on agricultural land. See D.L. Uchtmann & Bernard
Gehris, Illinois Drainage Law 14-23 (Dec. 1997),
http://web.aces.uiuc.edu/vista/pdf_pubs/DRAINAGE98.
pdf (visited Sept. 11, 2011). To facilitate the drainage
of excess water, the district had long ago obtained a right
of way on the land later bought by Wilder and had built a
pump house on the land to pump excess surface waters
into the Illinois River. To have at hand fuel for the pumps,
the drainage district stored petroleum both in storage tanks
that it owned in the vicinity, of which at least one was on
or under the land Wilder sold to The Nature Conservancy,
and in the pump house itself. (The Conservancy, wanting
to restore the land as wetlands, turned off the pumps.)
Wilder asks that the drainage district be ordered to
indemnify it for the money it’s had to pay the Conservancy
as damages for its breach of warranty. It claims to be
entitled to indemnity because, it argues, negligent mainte-
nance by the drainage district of the pump house and the
storage tanks was the sole cause of the contamination of
the Conservancy’s (formerly Wilder’s) land. It argues
that it should have been allowed to conduct discovery to
try to prove that it was indeed blameless and the district at
fault.
The Nature Conservancy’s suit against Wilder was a
contract suit rather than a tort suit. The warranty on which
the suit was based was, as we noted, imposed in the
contract of sale, not by law, as in the case of implied
warranties. Granted, Wilder’s denial that it contributed
to the petroleum contamination is not inconsistent with
its having lost the suit brought by the Conservancy,
6 No. 11-1185
because liability for breach of contract is strict. As
Holmes explained in The Common Law 300 (1881), “in
the case of a binding promise that it shall rain to-morrow,
the immediate legal effect of what the promisor does
is, that he takes the risk of the event, within certain defined
limits, as between himself and the promisee. He does
no more when he promises to deliver a bale of cotton.”
But the blameless contract breaker (“blameless” in the
sense that his breach was involuntary) cannot invoke
noncontractual indemnity to shift the risk that he assumed
in the contract.
The reasons are several. One is to head off the avalanche
of litigation that might be triggered if an involuntary
contract breaker could sue anyone for indemnity who
a court might find had contributed to the breach. Suppose
through negligence a livery service had failed to deliver
Wilder’s lawyer to a key negotiating session with
The Nature Conservancy, and as a result the lawyer had
been unable to review the warranty against petroleum
contamination that the Conservancy wanted included
in the contract of sale; had he been able to do so he would
have persuaded Wilder not to agree to it. Could Wilder
obtain a judgment against the livery service for indemnity?
It could not. The harm caused by the livery service’s
negligence would be deemed, as in such cases as Edwards
v. Honeywell, Inc., 50 F.3d 484, 489-91 (7th Cir. 1995), to
have been unforeseeable. For how could the livery service
have known what the consequences might be of failing
to get the lawyer to his appointment in time? This case
is less extreme. Although the drainage district may
No. 11-1185 7
not have known that Wilder had executed a warranty that
would make it liable for any negligent leakage by
the district, it would or should have known that it would
be liable, if it created a nuisance on Wilder’s land, to
whoever owned the land when the nuisance materialized.
But the defense against a suit brought not by the owner
but by a guarantor would be more complicated than
defending a nuisance case. For suppose, confident that it
could shift the cost of any judgment obtained by
The Nature Conservancy to the drainage district, Wilder
had not put up a strong defense on the damages phase of
the Conservancy’s suit; then in Wilder’s suit against
the district for indemnity, the district would have to
litigate the adequacy of Wilder’s defense in the earlier suit.
A further complication is that Wilder sold the land for a
use that was likely to make petroleum contamination a far
more serious problem than if the land had remained
ranchland.
The present suit is barred as well by the economic-loss
doctrine, which is also based (though only in part) on
concern with liability for unforeseeable consequences, and
which bars most negligence suits for purely financial loss
(that is, a loss unaccompanied by personal injury or
property damage), other than suits for fraud. “Otherwise,”
as we pointed out in Wausau Underwriters Ins. Co. v.
United Plastics Group, Inc., 512 F.3d 953, 957-58 (7th Cir.
2008) (Illinois law), “the extent of the seller’s [for which
read the drainage district’s] liability would often depend
on his purchaser’s [Wilder’s] contractual relations with
third parties, something about which [the district] nor-
mally would know little.”
8 No. 11-1185
To impose noncontractual indemnity in this case would
have the further, perverse consequence of making the
drainage district an insurer of Wilder’s contract with
The Nature Conservancy. One generally can’t insure
against a breach of contract, because of moral hazard
(the tendency of an insured to be less careful about pre-
venting the harm insured against than if it were
not insured). Krueger Int’l, Inc. v. Royal Indemnity Co.,
481 F.3d 993, 996 (7th Cir. 2007). Yet Wilder seeks to make
the drainage district the insurer of Wilder’s breach
of contract — and an involuntary insurer at that, as the
district couldn’t have prevented Wilder from warranting
that the land it was selling to the Conservancy was uncon-
taminated, though it might have been able to intervene
in the Conservancy’s suit against Wilder to protect its
interests.
We acknowledge that as between Wilder and the drain-
age district, the latter was in a better, and probably the
only, position to prevent the contamination. And so Wilder
can appeal to the principle, which underlies the tort
doctrine of indemnity along with many other tort doc-
trines, that liability for inflicting a harm should come to
rest on the party that could, at the lowest cost, have
prevented the harm in the first place. See Holtz v.
J.J.B. Hilliard W.L. Lyons, Inc., 185 F.3d 732, 743 (7th
Cir. 1999); Edwards v. Honeywell, Inc., supra, 50 F.3d at 490-
91; Rankin v. City of Wichita Falls, 762 F.2d 444, 448 n. 4 (5th
Cir. 1985); National Union Fire Ins. Co. v. Riggs
National Bank, 5 F.3d 554, 557 (D.C. Cir. 1993) (concurring
opinion). The pump house, and the petroleum-storage tank
or tanks on the property, were outside Wilder’s control.
No. 11-1185 9
It had no right to oversee their maintenance. It might
therefore seem to have a compelling argument for shifting
liability for the contamination from its own shoulders to
those of the district.
But the Illinois courts refuse to push the “least-cost
avoider” principle that far and to allow the doctrine of
indemnity to be used to shift damages for breach of
contract to a third party whose negligence caused
the breach. Schulson v. D’Ancona & Pflaum LLC, supra,821 N.E.2d at 647-48; Talandis Construction Corp. v. Illinois
Building Authority, 321 N.E.2d 154, 158-59 (Ill. App. 1974);
Board of Education of High School District No. 88 v. Joseph
J. Duffy Co., 240 N.E.2d 5, 7-8 (Ill. App. 1968). Nor, as far as
we’ve been able to determine, do courts in other jurisdic-
tions apply the doctrine of indemnity in such circum-
stances.
This judicial forbearance is reasonable, though it would
bind us whether it was or not. The requirement of
foreseeability for liability in tort, and the economic-loss
doctrine, and reluctance to allow a suit for breach of
contract to spawn a tort suit, are all compelling reasons for
that forbearance.
Had Wilder refused to give The Nature Conservancy a
warranty against petroleum contamination, the Conser-
vancy would doubtless have sued the drainage district
for committing the tort of nuisance (it could not have
sued Wilder for creating the nuisance — even if, as is
doubtful, Philadelphia Electric Co. v. Hercules, Inc., 762
F.2d 303, 312-16 (3d Cir. 1985), a buyer of land can ever
sue his seller for creating a nuisance — because Wilder had
10 No. 11-1185
no control over the storage of petroleum by the drainage
district). And then liability would have come to rest
ultimately on the least-cost avoider. It was Wilder’s
choice to shoulder the risk of liability for petroleum
contamination, and it would have been compensated
in advance by getting a higher price for the land — it would-
n’t have given such a dangerously broad warranty for
nothing. One cannot be heard to complain when a risk
materializes if one took it voluntarily because paid
one’s price for taking it.
Alternatively, Wilder could have insisted on the inclu-
sion in its contract with The Nature Conservancy of
a subrogation clause, whereby if forced to make good on its
warranty Wilder would step into the Conservancy’s shoes
as plaintiff in a nuisance suit against the district. In
Cutting v. Jerome Foods, Inc., 993 F.2d 1293 (7th Cir. 1993),
for example, a clause in the company’s ERISA plan
subrogated to the plan any claims by a beneficiary against
a third party. The beneficiary was injured in an automobile
accident, and the plan paid her medical expenses and
by virtue of doing so acquired her tort claim against
the injurer under the subrogation clause. By its warranty
Wilder insured the Conservancy against petroleum con-
tamination of the land Wilder was selling, and
a subrogation clause would have authorized Wilder to
sue the drainage district after making good on its warranty
to the Conservancy; so again the ultimate liability
would have come to rest on the least-cost avoider of the
contamination — and again Wilder failed to take steps
to accomplish this.
No. 11-1185 11
Subrogation is imposed usually by contract and some-
times (as in Hunt Construction Group, Inc. v. Allianz
Global Risks U.S. Ins. Co., 503 F.3d 632 (7th Cir. 2007))
by statute, but shouldn’t be available automatically to
every seller who provides his buyer with a warranty.
For then it would swallow the doctrine of indemnity:
unable to obtain indemnity because the doctrine cannot be
used to shift the cost of a breach of contract from
the contract breaker to a tortfeasor who contributed to the
breach, the contract breaker would call his claim against
the tortfeasor a subrogee’s claim instead of a claim for
indemnity.
The spectre of automatic subrogation, divorced from a
contractual or statutory grant of subrogation rights
and potentially overlapping with indemnity and contribu-
tion (partial indemnity, from a joint tortfeasor that is
not entirely blameless), is presented by the doctrine of
“equitable subrogation” (which the Illinois courts also refer
to as “legal subrogation,” though a more accurate term
would be “common law subrogation”): the provider to a
person of a benefit that was the primary obligation of a
third person may obtain restitution from that person if
necessary to prevent that person's being unjustly enriched,
even if no right of subrogation is conferred by contract or
statute. R estatem ent (T hird) of Restitution and
Unjust Enrichment § 24 (2011); American Nat’l Bank &
Trust Co. v. Weyerhaeuser Co., 692 F.2d 455, 460-61 (7th Cir.
1982) (Illinois law).
Equitable subrogation is a troublesomely vague doctrine:
“There is no general rule which can be laid down to
12 No. 11-1185
determine whether a right of [equitable] subrogation exists
since this right depends upon the equities of each particu-
lar case.” Dix Mutual Ins. Co. v. LaFramboise, 597 N.E.2d
622, 624. (Ill. 1992). So when, as in this case, contractual
subrogation is feasible, it should be encouraged, rather
than bypassed by appeal to equitable subrogation;
for when it is feasible for parties to arrange their affairs
by contract, they should have to do so rather than be
allowed to make a court do it for them. Wilder could
have protected itself against the drainage district’s negli-
gence by a subrogation clause in its contract with
The Nature Conservancy, failed to, and has only itself to
blame for that failure. It cannot invoke contractual
subrogation, having failed to obtain a subrogation clause,
and it has not invoked equitable subrogation — the scope of
which under Illinois law we therefore need not try to
determine.
A FFIRMED.
9-27-11