Robert Lodholtz v. Granite State Insurance Compa ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-8015
IN RE: ROBERT LODHOLTZ, et al.,
Petitioners,
____________________
Petition for Permission to Appeal from the
Northern District of Indiana, South Bend Division.
No. 3:11-cv-00435-RL-CAN — Rudy Lozano, Judge
____________________
SUBMITTED JULY 30, 2014— DECIDED OCTOBER 6, 2014
____________________
Before POSNER, KANNE, and WILLIAMS, Circuit Judges.
POSNER, Circuit Judge. Before us is a petition filed under
28 U.S.C. § 1292(b) for permission to appeal from an order
by the district court on the ground that though not the final
order in the litigation it resolved a “controlling question of
law” incorrectly, and that correction will expedite the resolu-
tion of the entire litigation—in fact end it. See Ahrenholz v.
Board of Trustees of University of Illinois, 219 F.3d 674, 675–76
(7th Cir. 2000). We grant the petition, and since the papers
filed by the parties cover the merits adequately, we can pro-
ceed to the decision of the appeal.
2 No. 14-8015
The case has a long tail; we’ll simplify. Robert Lodholtz,
seriously injured in 2011 while working at a plant owned by
Pulliam Enterprises in Indiana, filed a personal injury suit
against Pulliam in an Indiana state court. Pulliam asked
Granite State Insurance Company, its primary liability in-
surer, along with New Hampshire Insurance Company, its
umbrella insurer and Granite State’s parent (but we can ig-
nore it and treat Granite State as the only insurer), to defend
and indemnify it against the suit. Granite State declined to
do so, believing that Pulliam was not liable because, as an
employee injured in the course of his employment, Lodholtz
could not maintain a tort suit but only a claim for workers’
compensation. Lodholtz disagreed, contending that he’d
been employed not by Pulliam but by another firm even
though he’d been injured while working on Pulliam’s prem-
ises. Since he wasn’t Pulliam’s employee, he had no basis for
filing a claim for workers’ compensation.
When Pulliam failed to file an answer to the complaint,
Lodholtz moved for entry of a default judgment. His motion
was granted. But he agreed not to execute his default judg-
ment, and in return Pulliam agreed to assign him its rights
against Granite State.
Worried that it might have to indemnify Lodholtz and
continuing to insist that he’d been Pulliam’s employee when
injured, Granite State moved to intervene in Lodholtz’s suit
in order to assert the defense that Pulliam would have made
had it not defaulted. The Indiana trial court denied the mo-
tion to intervene and after taking evidence on the amount of
damages to which Lodholtz was entitled entered judgment
in his favor for almost $4 million.
No. 14-8015 3
Within days Granite State filed the present suit in federal
district court in Indiana, a diversity suit against Lodholtz
and Pulliam seeking a declaratory judgment that Granite
State has no duty to indemnify Pulliam. Moving on a differ-
ent front, a month later Granite State appealed to the Indiana
Court of Appeals from the trial court’s denial of its motion to
intervene in Lodholtz’s state court suit against Pulliam. It
argued that it had a sufficient interest in the suit to justify
intervention in order to prove that Lodholtz’s exclusive rem-
edy was under the state’s workers’ compensation act be-
cause he had been employed by Pullman, and not merely
working on its premises, when the accident occurred.
The court of appeals affirmed the denial of Granite
State’s motion to intervene. Granite State Ins. Co. v. Lodholtz,
981 N.E.2d 563 (Ind. App. 2012). The court pointed out that
Granite State had sought leave to intervene in order to de-
fend Pulliam against Lodholtz’s suit under a reservation of
rights. That is, Granite State wanted to reserve the right,
should Lodholtz obtain any damages in the suit, to try to
avoid having to reimburse Pulliam for those damages by
showing that it had no duty to indemnify Pulliam. A reser-
vation of rights is problematic from the insured’s standpoint.
It creates a risk that the insurer will not put up a strong de-
fense to the suit against the insured (Lodholtz’s suit against
Pulliam), wishing to economize on legal expense and hoping
to avoid having to indemnify the insured at all if the latter is
hit with a judgment. Mindful of this danger, the Indiana
courts forbid the insurer to control the defense of the insured
without acknowledging coverage. Cincinnati Ins. Co. v.
Young, 825 N.E.2d 8, 13–15 (Ind. App. 2006); see also Travel-
ers Indemnity Co. v. Dingwell, 884 F.2d 629, 638–40 (1st Cir.
1989). “Such intervention [in the defense of the suit] would
4 No. 14-8015
unfairly restrict the insured, who faces the very real risk of
an uninsured liability, and grant the insurer ‘a double bite at
escaping liability.’” Id. at 639, quoting United States Automo-
bile Ass’n v. Morris, 741 P.2d 246, 251 (Ariz. 1987).
Granite State sought review of the appellate court’s deci-
sion in the Indiana Supreme Court, and was turned down,
ending the state court litigation. Although at both appellate
levels Granite State had argued that the judgment in Lod-
holtz’s favor should be vacated, neither court addressed the
argument in refusing to allow the insurance company to in-
tervene. We’ll come back to this omission.
One might have thought that Granite State’s total defeat
in the Indiana court system would have doomed its federal
suit, based as it was on the same assertion that Lodholtz had
been Pulliam’s employee. But no; the federal district court, at
Granite State’s urging after the state courts had finished with
the case, ruled that because Lodholtz’s employer had
“leased” Lodholtz to Pulliam to do work at Pulliam’s plant,
he had been Pulliam’s employee as well, and that therefore
the Indiana state court judgment in favor of Lodholtz should
be “disregarded.” For if, as the federal judge believed, Lod-
holtz had been Pulliam’s employee when injured, the state’s
workers’ compensation act had deprived the Indiana courts
of jurisdiction to entertain his tort suit. Indiana courts have
no jurisdiction to entertain a tort suit by an injured worker
against his employer. GKN Co. v. Magness, 744 N.E.2d 397,
400 (Ind. 2001). That is the exclusive domain of workers’
compensation, an administrative rather than judicial reme-
dy.
The state trial court, which entered judgment against Pul-
liam, obviously thought it had subject-matter jurisdiction.
No. 14-8015 5
The appellate court must have thought so as well. For it
ruled on Granite State’s motion to intervene, and it would
have lacked jurisdiction to do so had the trial court lacked
jurisdiction of Lodholtz’s suit. The trial court and the appel-
late court knew of course that Granite State wanted to argue
that the courts had no jurisdiction over Lodholtz’s tort
case—that jurisdiction to award him compensation lay solely
in the Workers Compensation Board of Indiana. The trial or
appellate court could easily have said “now that we know
there may be a question of our subject-matter jurisdiction
we'd better answer it, mindful of our independent duty to
police our jurisdiction.” That neither Indiana court said or
hinted at this indicates that both were satisfied that there
was jurisdiction. The trial court had awarded millions of dol-
lars in damages to Lodholtz, all premised on a finding that
he was not Pulliam's employee. The appellate court had no
reason to doubt that the trial court had had jurisdiction to
make such an award.
The question for us therefore is whether a federal court
can ignore a state court judgment on the ground that the
state court misconceived its jurisdiction over the case, and
thus whether it is open to Granite State to try to prove in its
federal case that Lodholtz really was an employee of Pulliam
and therefore the state courts had no jurisdiction of his suit
against Pulliam.
Rule 60(b)(4) of the Federal Rules of Civil Procedure au-
thorizes a federal district court to relieve a party from a final
judgment if the judgment is “void” (Indiana has the same
rule for its courts: Indiana Rule of Trial Procedure 60(B)(6).)
The normal procedure is to file a motion in the court that
rendered the judgment. But Rule 60(d)(1) authorizes “an in-
6 No. 14-8015
dependent action to relieve a party from a judgment.” This is
an authority to be exercised rarely; collateral attacks on sub-
ject-matter jurisdiction are to be discouraged, as the Su-
preme Court said in Travelers Indemnity Co. v. Bailey, 557 U.S.
137, 152–54 (2009). Though the bar is not absolute, see id. at
153 n. 6, it is to be lifted only in “egregious” cases. As for
other cases “the courts say that the court that issued the
judgment in excess of its jurisdiction had jurisdiction to de-
termine jurisdiction, and its jurisdictional finding, even if
erroneous, is therefore good against collateral attack, like
any other erroneous but final judgment.” In re Edwards, 962
F.2d 641, 644 (7th Cir. 1992); United States v. Tittjung, 235
F.3d 330, 335 (7th Cir. 2000).
One might have thought that because the Indiana courts
denied Granite State’s motion to intervene, the insurance
company never had a chance to argue absence of jurisdiction
as a party to the litigation. As we know, that is not true; we
know that Granite State made the argument—indeed the ar-
gument was the entire premise of its refusal to cover Lod-
holtz’s liability to Pulliam. Had Granite State been willing to
relinquish its reservation of rights, its motion to intervene
would have been granted. It was not willing; and in assert-
ing a reservation of rights it was trying to undermine the In-
diana law that gives the insured the right to manage its own
defense when the insurer reserves the right to deny cover-
age.
The Supreme Court of the United States is the only fed-
eral court with appellate authority over state courts; that is
the Rooker-Feldman doctrine. See Rooker v. Fidelity Trust Co.,
263 U.S. 413 (1923); District of Columbia Court of Appeals v.
Feldman, 460 U.S. 462 (1983). But even the Supreme Court
No. 14-8015 7
would have had no authority over the Indiana courts in Lod-
holtz v. Pulliam because no issue of federal law was involved
in that litigation. Granite State has struck out. The jurisdic-
tional issue on which its federal suit is based was resolved
against it by the Indiana courts, and there is no ground for a
collateral attack by another judicial system on that determi-
nation.
The judgment is reversed and Granite State’s suit dis-
missed.