No Defense Obligation Found Based on Claim Preclusion

By Don R. Sampen, published, Chicago Daily Law Bulletin, September 19, 2023

The 3rd District Appellate Court, applying res judicata principles, recently relieved an insurer of a defense obligation based on a finding of the insureds’ lack of cooperation in a related prior lawsuit.

The case is Nationwide Mutual Insurance Co. v. Srachta, 2023 IL App (3d) 220089 (Aug. 14). The insureds, the Beverly Glen Homeowners Association and several directors, were represented by the KMD Law Office Ltd. in Chicago. Lindsay, Pickett & Postel LLC in Chicago represented the insurer, Nationwide.

Two residents of the association, Teresa and Katarynza Jagiello, engaged in ongoing disputes with the association and directors over alleged fraud and repair issues, with the residents filing suit in 2017. The association’s insurer, Nationwide, provided a defense, and the trial court awarded partial relief to both sides.

In 2018, the association filed a complaint against the Jagiellos, in response to which they filed a seven-count counterclaim against the association and certain board members. The counterclaim sought access to certain association minutes and other documents, along with other relief.

Nationwide provided counsel for the counter-defendants but also intervened in the lawsuit, seeking a declaration of lack of coverage. Subsequently, although a partial settlement was reached, certain of the counter-defendants attempted to direct the defense of the counterclaim on their own.

Nationwide objected and sought a determination that it had no further duty to defend because of the lack of cooperation by the association and certain directors. The trial court agreed and entered an order in 2020 relieving Nationwide of its defense obligation, along with a Supreme Court Rule 304(a) order finalizing the court’s determination. No appeal was taken.

Later the same year, the Jagiellos filed a separate derivative lawsuit against the association and certain board members. That action claimed the association board had breached its fiduciary duty by refusing to cooperate with Nationwide, refused to produce documents as provided for in the earlier partial settlement, misappropriated funds, and engaged in other wrongful conduct.

Nationwide then filed the instant declaratory action seeking a determination that it had no duty to defend the defendants in the derivative action. Among other grounds, Nationwide relied on res judicata and collateral estoppel arising from the lack-of-cooperation finding in favor of Nationwide in connection with the earlier counterclaim.

The trial court agreed and granted Nationwide’s motion for judgment on the pleadings. The association and board members took this appeal.

Analysis

In an opinion by Justice Joseph P. Hettel, the 3rd District affirmed. After initially rejecting the association’s ripeness and mootness arguments, he turned to the res judicata and collateral estoppel determinations.

He began by noting the technical legal requirements for the two doctrines, pointing out the necessity for (1) a final determination in the prior action, (2) an identity of the cause of action (res judicata) or issue (collateral estoppel) as between the prior lawsuit and current one, and (3) an identity of parties or their privies as between the two lawsuits and against whom the doctrine was to be applied.

The association defendants agreed that the final judgment requirement had been met. They contended, however, that the parties were different as between the prior counterclaim and current derivative lawsuit because three of the directors named in the derivative suit were not included in the prior counterclaim. They further argued that the causes of action or issues were different.

Hettel disagreed. As for identity of parties, he noted that two directors were the same, and even though three directors were not, the added directors in the derivative action were in privity with the earlier directors. They were in privity because the director-board members had been named in both lawsuits in their capacity as directors of the association. They acted as the arms of the association and for all intents and purposes were one and the same.

Regarding the cause-of-action requirement, Hettel applied the transactional test for determining whether the two cases were the same. Under that test, while different theories of relief may have been asserted in the two lawsuits, a single cause of action nonetheless exists if a single group of operative facts gives rise to the assertion of relief.

In this case, Hettel found that the claims at issue in the prior counterclaim and the later derivative lawsuit arose from the same nucleus of operative facts involving the Jagiellos’ request for documents and the defendants’ subsequent response. That included the new facts alleged in the derivative lawsuit, which related to the defendants’ original refusal to comply with the Jagiellos’ request for documents.

Concerning the defendants’ argument that Nationwide should not be allowed to assert the res judicata doctrine “offensively,” Hettel wrote that the insurer was merely attempting to use the doctrine as a shield in the underlying derivative suit, which was not unfair or unjust.

The court therefore affirmed the judgment in favor of Nationwide.

Key Point

An insurer may assert non-cooperation by an insured arising by way of res judicata or collateral estoppel as a basis for a no-defense-obligation determination where the insured has been found uncooperative in prior litigation and the subsequent litigation meets the criteria for application of one or both preclusion theories.