Mount Mansfield Insurance Group v. American International Group

THIRD DIVISION

March 30, 2007

No. 1-06-0974

MOUNT MANSFIELD INSURANCE ) Appeal from

GROUP, INC., ) the Circuit Court

) of Cook County.

Plaintiff-Appellant, )

)

v. )

)

AMERICAN INTERNATIONAL GROUP, INC., )

INSURANCE COMPANY OF THE STATE OF ) No. 05 L 6662

PENNSYLVANIA, ILLINOIS NATIONAL )

INSURANCE COMPANY, NATIONAL UNION )

FIRE INSURANCE COMPANY, AIG RISK )

MANAGEMENT, INC., and AIG CLAIM )

SERVICES, INC., ) Honorable

) Paddy McNamara,

Defendants-Appellees. ) Judge Presiding.

PRESIDING JUSTICE THEIS delivered the opinion of the court:

Plaintiff, Mount Mansfield Insurance Group, Inc. (Mount Mansfield), filed a ten-count

complaint against defendants, American International Group, Inc. (AIG), and several of its

affiliates, including Insurance Company of the State of Pennsylvania, Illinois National Insurance

Company, National Union Fire Insurance Company, AIG Risk Management, Inc., and AIG

Claim Services, Inc. (collectively referred to as AIG’s affiliates). The complaint alleged that AIG

and its affiliates improperly handled workers’ compensation claims, inflated the value assigned

to Mount Mansfield’s reserve requirements, and unnecessarily forced Mount Mansfield into

1-06-0974

rehabilitation, resulting in damage to the corporation. Mount Mansfield sought recovery under

various theories including breach of contract, conversion, fraud, and violation of the Consumer

Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq. (West 2004)). The circuit

court dismissed the complaint pursuant to section 2-619(a)(4) of the Code of Civil Procedure (the

Code) (735 ILCS 5/2-619(a)(4) (West 2004)), finding that the claims were barred by the doctrine

of res judicata based upon a prior lawsuit.

On appeal, Mount Mansfield contends that the trial court erred in finding its complaint

barred by res judicata for the following reasons: (1) the claims and the parties are distinct from

the prior case; (2) AIG and its affiliates are judicially estopped from relying on the doctrine based

on inconsistent positions taken in the two cases; and (3) application of the doctrine would be

unfair and unjust. For the following reasons, we reverse the judgment of the circuit court and

remand for further proceedings.

BACKGROUND

In 1992, a group of companies in the business of leasing employees in the trucking and

distribution industries formed a holding company called MMIG, Inc. (MMIG). Additionally, at

the same time, Mount Mansfield was established as MMIG’s wholly owned subsidiary to create a

captive insurance company for workers’ compensation claims. AIG and its affiliates were

responsible for issuing the insurance policies to the shareholder companies of MMIG and

providing them with claims handling services for claims filed by their employees. As the

“captive insurer,” Mount Mansfield provided reinsurance to AIG and its affiliates to reimburse

them for losses. As part of that responsibility, it was required to maintain a certain amount of

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reserves for claims. These reserve requirements were based upon calculations made by AIG.

Over time, a dispute arose regarding AIG and its affiliates’ claims handling practices and

the value assigned to Mount Mansfield’s reserve requirements, allegedly causing the shareholder

companies of MMIG to incur increased premiums on their workers’ compensation policies, and

causing Mount Mansfield to appear less financially solvent. Shortly thereafter, AIG and its

affiliates allegedly informed the Vermont Department of Banking, Insurance, Securities and

Health Care Administration that, according to its calculations, Mount Mansfield was indeed

insolvent. On February 3, 1997, Mount Mansfield’s assets were seized and its board of directors

was enjoined from transacting the company’s affairs. An order to rehabilitate Mount Mansfield

was entered on October 30, 1997. On June 19, 2003, the rehabilitation proceedings were

terminated, and Mount Mansfield was released back to the control of its board of directors.

The Previous Litigation

In order to fully comprehend the proceedings which AIG now claims act as a bar to the

current litigation, it is necessary to provide a history of the various amended complaints that were

filed and the parties involved in those proceedings (Aldworth v. AIG, No. 97 L 14647 (Cir. Ct.

Cook Co.)) (the Aldworth action). Originally, in 1997, Mount Mansfield’s sole shareholder,

MMIG, and several of its shareholder companies filed a complaint against AIG and its affiliates.

After several amendments, the shareholder companies of MMIG sought recovery from AIG and

its affiliates alleging that their wrongful conduct caused an increase in their insurance premiums,

a need to reimburse Mount Mansfield for its losses, and an increase in the cost of future workers’

compensation insurance. Additionally, MMIG purported to bring a shareholder derivative action

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on behalf of Mount Mansfield. MMIG alleged that as a result of AIG’s improper conduct, it and

Mount Mansfield were “effectively driven out of business” and Mount Mansfield was forced into

rehabilitation. Mount Mansfield was not a party to the litigation as it was in rehabilitation and its

board of directors was allegedly enjoined from transacting business, including authorizing the

filing of a lawsuit in its name.

Thereafter, AIG and its affiliates filed a motion to dismiss the amended complaints

pursuant to sections 2-615 and 2-619 of the Code. 735 ILCS 5/2-615, 2-619 (West 2002)).

Therein, they argued, inter alia, that the shareholder companies of MMIG lacked standing in

counts I and II to allege injuries for their lost investment in Mount Mansfield because that alleged

injury resulted only from their status as shareholders and was, thus, derivative in nature. They

asserted that these claims “belong, if they exist at all, to Mount Mansfield, an insolvent Vermont

reinsurance company, which is not a party to this action.”

Additionally, AIG and its affiliates argued that in counts III, IV and V, MMIG failed to

allege the prerequisites for a proper shareholder derivative action. Specifically, they maintained

that MMIG failed to allege that their purported demand on Mount Mansfield or the rehabilitator

had been rejected, and failed to allege that such a rejection would be the result of fraud, illegality

or conflict of interest as mandated by the Business Corporation Act of 1983 (805 ILCS 5/1.01 et

seq. (West 2002)). Accordingly, AIG argued that the shareholder companies of MMIG lacked

standing to proceed under counts I and II, and that MMIG failed to comply with the prerequisites

for bringing a proper shareholder derivative action in counts III, IV and V. On September 19,

1998, the circuit court granted the shareholder companies of MMIG leave to amend and replead

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counts I and II against AIG and its affiliates, and dismissed counts III, IV and V, the derivative

counts, without prejudice.

Ultimately, a third amended complaint was filed by certain shareholder companies of

MMIG, attempting to pursue their individual claims as insureds against their insurers, AIG and

its affiliates based upon their distorted retrospective premium calculations. MMIG was not a

party to that complaint. On July 17, 2002, the third-amended complaint was voluntarily

dismissed and a virtually identical complaint was refiled on July 16, 2003. At that time, Mount

Mansfield was no longer in rehabilitation. It did not pursue litigation at that time. Five months

later, on December 15, 2003, the refiled Aldworth action was nonsuited for a second time. On

June 30, 2004, the circuit court denied a motion brought by new counsel to vacate that order and

dismissed the refiled Aldworth action with prejudice.

The Present Lawsuit

On June 16, 2005, Mount Mansfield filed a ten-count complaint. Therein, it alleged that

AIG and its affiliates improperly handled workers’ compensation claims, inflated the value

assigned to the corporation’s reserve requirements, and forced the corporation to defend itself in

an unnecessary rehabilitation, resulting in damage to the corporation. Mount Mansfield sought

recovery under various theories including breach of contract, conversion, fraud, and violation of

the Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq. (West

2004)).

Thereafter, AIG and its affiliates filed a motion to dismiss the complaint pursuant to

section 2-619(a)(4) of the Code (735 ILCS 5/2-619(a)(4) (West 2004)), maintaining that the prior

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judgment in the Aldworth case acted as a bar to Mount Mansfield’s current action based on the

doctrine of res judicata. Therein, they argued essentially that MMIG, the shareholders of MMIG,

and Mount Mansfield were all in privity with each other, referring to them collectively as the “the

Mount Mansfield plaintiffs” and referring to the shareholder companies of MMIG as the “Mount

Mansfield Owners/Insureds.” Additionally, AIG and its affiliates argued that there was an

identity of causes of action in that, in both proceedings, the parties claimed that AIG and its

affiliates had mishandled their workers’ compensation claims and committed other wrongful acts

in connection with the Mount Mansfield rehabilitation proceedings. After briefing and a hearing

in connection with the motion, the circuit court granted the motion to dismiss, finding the

complaint barred by res judicata.

ANALYSIS

A motion to dismiss pursuant to section 2-619(a)(4) of the Code admits the legal

sufficiency of the complaint and raises defects, defenses, or other affirmative matters that defeat

the claim. IFC Credit Corp. v. Magnetic Technologies, Ltd., 368 Ill. App. 3d 898, 900, 859

N.E.2d 76, 78-79 (2006). Our review of such a motion is de novo. IFC Credit Corp., 368 Ill.

App. 3d at 900, 859 N.E.2d at 78-79.

Mount Mansfield contends that the circuit court erred in finding its cause of action barred

by res judicata because it argues that it was not a party to the Aldworth case nor in privity with

the parties that brought that action. It is well-settled that a final judgment on the merits rendered

by a court of competent jurisdiction acts as a bar to a subsequent suit between the parties

involving the same cause of action. River Park, Inc. v. City of Highland Park, 184 Ill. 2d 290,

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302, 703 N.E.2d 883, 889 (1998). Res judicata promotes judicial economy by requiring parties

to litigate in one case all claims arising out of the same group of operative facts. Nowak v. St.

Rita High School, 197 Ill. 2d 381, 393, 757 N.E.2d 471, 479 (2001). The doctrine applies not

only to what was decided in the first action, but also “those matters that could have been decided

in that suit.” River Park, Inc., 184 Ill. 2d at 302, 703 N.E.2d at 889. The following requirements

must be met for the doctrine to apply: (1) a court of competent jurisdiction rendered a final

judgment on the merits; (2) there is an identity of parties or their privies; and (3) there is an

identity of causes of action. Nowak, 197 Ill. 2d at 390, 757 N.E.2d at 477; River Park, Inc., 184

Ill. 2d at 302, 703 N.E.2d at 889.

The parties to this appeal agree that Mount Mansfield was not a party to the Aldworth

action, but disagree with respect to the issue of privity. Under Illinois law, “[p]rivity is said to

exist between ‘ “parties who adequately represent the same legal interests.” ’ [Citations.]” People

ex rel. Burris v. Progressive Land Developers, Inc., 151 Ill. 2d 285, 296, 602 N.E.2d 820, 826

(1992); accord Bagnola v. SmithKline Beecham Clinical Laboratories, 333 Ill. App. 3d 711, 718,

776 N.E.2d 730, 736 (2002). See also Smith v. Bishop, 26 Ill. 2d 434, 438, 187 N.E.2d 217, 219

(1962) (“[p]rivity contemplates a mutual or successive relationship to the same property rights

which were the subject matter of prior litigation”). Thus, the relevant inquiry here is whether

Mount Mansfield’s corporate interests were adequately represented in the Aldworth case. In

order to determine that, it is necessary to understand the relationship among MMIG, the

shareholder companies of MMIG, and Mount Mansfield.

Initially, AIG and its affiliates maintain that Mount Mansfield is “owned” by the

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shareholder companies of MMIG and, thus, privity stems from that relationship. This argument

oversimplifies and “glosses over” the layers of corporate structure here. The law is well-settled

that a corporation is an entity legally separate and distinct from its individual shareholders. Main

Bank of Chicago v. Baker, 86 Ill. 2d 188, 204-05, 427 N.E.2d 94, 101 (1981). Thus, a

shareholder of a corporation has no personal or individual right to pursue an action against third

parties for damages resulting indirectly to the shareholder because of an injury to the corporation.

Sarno v. Thermen, 239 Ill. App. 3d 1034, 1048, 608 N.E.2d 11, 21 (1992); 12B W. Fletcher,

Private Corporations §5911 (rev. perm ed. 1984).

Exceptions to the general rule are recognized when a shareholder is able to maintain a

derivative action on behalf of the corporation. Mann v. Kemper Financial Cos., 247 Ill. App. 3d

966, 974, 618 N.E.2d 317, 323 (1992). “To maintain a suit on behalf of a corporation, a

shareholder must allege and prove an equitable basis for such intervention, and a shareholder is

no more entitled to challenge a decision by the board of directors not to sue through a derivative

action than to challenge any other board decision.” American National Bank in Dekalb v.

Richoz, 189 Ill. App. 3d 775, 782, 545 N.E.2d 550, 554-55 (1989).

Thus, in the Aldworth action, MMIG, as the sole shareholder of Mount Mansfield, had no

right to represent the interests of its subsidiary unless it was able to pursue a derivative action on

its behalf. Additionally, the shareholder companies of MMIG had no right to represent the

interests of Mount Mansfield unless they brought a double derivative action, seeking a demand

from both MMIG, the holding company, and Mount Mansfield as its subsidiary. Brown v.

Tenney, 125 Ill. 2d 348, 356-57, 532 N.E.2d 230, 233 (1988). No such action was ever brought

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in the Aldworth action. Rather, the shareholder companies of MMIG brought individual actions

as insureds against their insurer for mishandling claims and subjecting the insureds to increased

current and future premiums. Accordingly, having pursued individual rather than derivative

rights, they did not adequately represent the legal interests of Mount Mansfield in the Aldworth

action. Additionally, although MMIG attempted to bring a shareholder derivative action, it was

unable to meet the pleading requirements under the Business Corporation Act of 1983 (805 ILCS

5/1.01 et seq. (West 2002)), and as alleged, Mount Mansfield was enjoined from authorizing the

filing of a such a lawsuit in its name. MMIG was, therefore, unable to establish its right to bring

an action on Mount Mansfield’s behalf. Thus, MMIG could not adequately represent the legal

interests of Mount Mansfield in those proceedings.

Indeed, AIG and its affiliates took this same position in the Aldworth action when

pursuing their motions to dismiss that action. Essentially, they argued therein that the

shareholder companies of MMIG lacked standing to take legal action to remedy an infringement

of the corporation’s rights, and MMIG could not adequately allege a proper basis for a derivative

action. They asserted that these corporate claims “belong[ed], if they exist[ed] at all, to Mount

Mansfield, an insolvent Vermont reinsurance company, which [was] not a party to [the] action.”

The notions of standing and privity are interrelated here. The “inquiry regarding standing is

whether a litigant, either in an individual or representative capacity, is entitled to have the court

decide the merits of a dispute or a particular issue.” In re Estate of Wellman, 174 Ill. 2d 335,

344, 673 N.E.2d 272, 276 (1996). As indicated, the inquiry regarding privity is whether the

parties adequately represent the same legal interests. People ex rel. Burris, 151 Ill. 2d at 296, 602

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N.E.2d at 826. Thus, where a party has no standing to bring a cause of action on behalf of

another party, either individually or derivatively, it also must be said to lack privity with the other

party because it cannot adequately represent the other party’s legal interests. Accordingly, AIG

and its affiliates’ position in the Aldworth action supports the finding that neither the shareholder

companies of MMIG nor MMIG adequately represented the legal interests of Mount Mansfield.

Despite these separate and distinct legal interests, AIG and its affiliates argue that there is

privity among them because Mount Mansfield “oversaw and directed the prior case.” In support,

they cite evidence in the record that the president and chairman of the board of Mount Mansfield

had interactions with and communicated with counsel handling the Aldworth action in an attempt

to “protect its own interests.” AIG and its affiliates offer no authority for the proposition that

merely coordinating information with counsel in an effort to protect Mount Mansfield’s interests

would establish privity, nor do we find any authority to support that proposition. Accordingly,

this argument lacks merit.

Lastly, AIG and its affiliates argue that because Mount Mansfield’s rehabilitation

concluded in June 2003, and the Aldworth action was not ultimately dismissed until June 2004, it

could have joined as a plaintiff in that case. Although claims that could have been brought in the

initial proceeding are barred, this proposition only acts as a bar where all of the other elements of

res judicata are met. Nowak, 197 Ill. 2d at 390, 757 N.E.2d at 477. Where, here, there is no

identity of parties or their privies, we need not consider whether Mount Mansfield could have

brought its claim at that time. This argument is, at best, one regarding the principle of joinder.

Joinder of plaintiffs is permissive and not mandatory. 735 ILCS 5/2-404 (West 2004).

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Accordingly, where Mount Mansfield was not a party or in privity with the parties in the

Aldworth action, its claims are not barred by the doctrine of res judicata. We reverse the

judgment of the circuit court and remand for further proceedings.

Reversed and remanded.

GREIMAN and CUNNINGHAM, JJ., concur.

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REPORTER OF DECISIONS - ILLINOIS APPELLATE COURT

_________________________________________________________________

MOUNT MANSFIELD INSURANCE GROUP, INC.,

Plaintiff-Appellant,

v.

AMERICAN INTERNATIONAL GROUP, INC., INSURANCE COMPANY OF THE

STATE OF PENNSYLVANIA, ILLINOIS NATIONAL INSURANCE COMPANY,

NATIONAL UNION FIRE INSURANCE COMPANY AIG RISK MANAGEMENT,

INC., and AIG CLAIM SERVICES, INC.,

Defendants-Appellees,

________________________________________________________________

No. 1-06-0974

Appellate Court of Illinois

First District, Third Division

Filed: March 30, 2007

_________________________________________________________________

PRESIDING JUSTICE THEIS delivered the opinion of the court.

Greiman and Cunningham, JJ., concur.

_________________________________________________________________

Appeal from the Circuit Court of Cook County

Honorable Paddy McNamara, Judge Presiding

_________________________________________________________________

For PLAINTIFF - Richard J. Hickey

APPELLANT Christopher R. Zink

Hickey, Melia & Associates, Chartered

77 W. Washington St., Suite 800

Chicago, IL 60602

For DEFENDANTS - James W. Hutchinson

APPELLEES David S. Slovick

Katten Muchin Rosenman LLP

525 W. Monroe St.

Chicago, IL 60661