Cont'l Indem. Co. v. BII, Inc.

104 F.4th 630

CONTINENTAL INDEMNITY COMPANY, individually and as subrogee ofThe Linn Contracting Companies, Inc., Plaintiff-Appellant, v. BII, INC., an Illinois Corporation doing business as Paramount Post, Defendant,andStarr Indemnity & Liability Co., Garnishee-Appellee.

No. 23-1648

United States Court of Appeals, Seventh Circuit

Argued January 25, 2024

Decided June 12, 2024

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:18-cv-05520 — Rebecca R. Pallmeyer, Chief Judge.

Kenneth Gordon Anspach, Attorney, Anspach Law Office, Chicago, IL, for Plaintiff-Appellant.

Karen M. Dixon, Attorney, Skarzynski Marick & Black LLP, Chicago, IL, for Garnishee-Appellee.

Before Hamilton, Brennan, and Kirsch, Circuit Judges.

Hamilton, Circuit Judge.

Plaintiff-appellant Continental Indemnity Company secured a default judgment for $607,712.12 against defendant BII, Inc. arising from an injury to a worker at a construction site. Continental sought to collect on the judgment by adding appellee Starr Indemnity & Liability Company to the action as a garnishee using Illinois state law procedures under Federal Rule of Civil Procedure 69(a). Starr denied that its insurance contract with BII covered the workers' compensation claim that was the subject of Continental's default judgment against BII. The district court found that adjudicating the disputed scope of coverage under the Starr-BII insurance policy was outside its subject matter jurisdiction because it was too distinct, factually and legally, from the underlying suit between Continental and BII. The district court dismissed the proceeding against garnishee Starr, and Continental has appealed.

We must confess some uncertainty about the purpose of this appeal. As the district court explained, if Continental wants a federal forum to litigate this dispute with Starr, that forum is available for the price of filing one new civil action in the Northern District of Illinois. Still, Continental had the right to appeal, and we are obliged to decide it. As we explain below, we agree with the district court and affirm its dismissal for lack of jurisdiction.

At bottom, the appeal turns on the scope of a federal court's ancillary jurisdiction in the context of Rule 69 post-judgment enforcement efforts. Precedents from the Supreme Court and this circuit make clear the general principle that federal courts have ancillary enforcement jurisdiction to consider proceedings collateral to an underlying suit, but the subject of those proceedings must still be sufficiently related to the facts and legal issues of the original action. Attempting to adjudicate new issues of liability against new parties falls outside the scope of ancillary enforcement jurisdiction and therefore cannot be done through certain enforcement proceedings under Rule 69. But at the end of the day, whether a proceeding falls into a federal court's ancillary jurisdiction will be a case-by-case, fact-dependent inquiry.

I. Facts and Procedural History

A. The Injury to Mr. Lumpkins

On August 19, 2016, Alfred Lumpkins was injured while working for defendant BII on a construction site on South Maplewood Street in Chicago, Illinois. In early June 2016, Linn-Mathes, a general contractor, had contracted with BII to perform post-construction cleaning work at the Maplewood Street site. The contract between Linn-Mathes and BII required BII to maintain insurance, including workers' compensation coverage, because it was responsible for the safety of its employees at the Maplewood Street site. After his injury, Mr. Lumpkins filed a workers' compensation claim against both BII and Linn-Mathes.

In most such cases of on-the-job injury, the employer's workers' compensation insurer will step in and handle the case through the Illinois workers' compensation system, and indeed, BII had purchased a workers' compensation insurance policy from Hartford Insurance Company. The problem was that BII had failed to pay premiums. BII's workers' compensation policy lapsed from July 11, 2016 to August 26, 2016. BII was not insured by Hartford when Mr. Lumpkins was injured.

Plaintiff Continental is Linn-Mathes's insurer. Pursuant to the contract between BII and Linn-Mathes, as well as under Illinois insurance law, Continental paid Mr. Lumpkins' worker compensation claim in the amount of $451,402.28 plus defense costs and expenses in the amount of $137,576.31. This totaled $588,978.59. Continental then sought reimbursement from BII for the payment of the Lumpkins claim pursuant to the contract between Linn-Mathes and BII and Illinois insurance law. Hartford declined a claim made by BII to provide coverage for the Lumpkins claim because of the lapse in insurance coverage. During this time, BII never informed garnishee-appellee Starr of the Lumpkins claim.

B. The Default Judgment

In 2018, Continental filed this action in the Northern District of Illinois seeking a declaratory judgment that BII was liable for the Lumpkins workers' compensation claim and that BII was therefore indebted to Continental for the amounts it paid on the claim. All parties and we agree that the district court had subject matter jurisdiction over the declaratory judgment action based on diversity of citizenship under 28 U.S.C. § 1332. In July 2021, the district court entered a default judgment in favor of Continental in the amount of $607,712.12, comprising the $588,978.59 principal claim plus prejudgment interest and costs.

C. Garnishment Proceeding

At the time of the entry of the default judgment for Continental, then-District Judge John Lee presided over the case. After securing the judgment, Continental sought to collect on the judgment using Illinois state procedures, as allowed under Federal Rule of Civil Procedure 69(a). On August 17, 2021, Continental filed and served a "Non-Wage Garnishment Summons" against Starr, which had never been a party to the underlying suit that led to the default judgment. The summons contained an attached affidavit signed by the secretary and general counsel of Continental attesting that, upon belief, Starr was either indebted to the judgment-debtor BII, or, alternatively, possessed or controlled property (other than wages) belonging to BII. More specifically, Continental said it believed that Starr held an insurance policy for BII that covered Mr. Lumpkins' claim that was the basis for the default judgment against BII.

Due to an internal mix-up, Starr's legal department never received the summons. As a result, Starr failed to file an appearance or answer by the deadline specified under the Illinois garnishment statute that was being used by the district court under Rule 69(a). Continental then filed a Motion for Entry of Conditional Judgment against Starr pursuant to 735 ILCS 5/12-706, again, acting under Rule 69. Judge Lee issued a conditional judgment against Starr on October 19, 2021 and ordered Starr to show cause why the judgment should not be made final. Continental also sent interrogatories to Starr asking for sworn answers to whether Starr had issued a workers' compensation policy to BII that was in force on the date of the Lumpkins injury and whether Starr ever assumed a defense of the Lumpkins claim.

This time Starr responded. It appeared in the district court and filed answers to the interrogatories. It explained that while Starr had issued an insurance policy for BII that was in force at the time of Mr. Lumpkins' injury, the policy was only for a different worksite and did not cover the Lumpkins claim. The answers also explained that Starr never assumed a defense of BII to the Lumpkins claim because BII never provided Starr notice of the case and never sought coverage for the claim under the Starr policy.

Continental filed a motion contesting the sufficiency of Starr's response and answer pursuant to 735 ILCS 5/12-711(a). Starr filed a response in opposition to Continental's motion and Judge Lee ultimately set a summary judgment briefing schedule.

D. District Court Decision

After Judge Lee's appointment to this court in September 2022, the case was reassigned to Chief Judge Pallmeyer. After the parties completed summary judgment briefing, Chief Judge Pallmeyer ordered Continental to "show cause . . . why the garnishment proceeding it filed against [Starr] should not be dismissed for lack of subject matter jurisdiction." Both parties briefed subject matter jurisdiction.

Ultimately, Chief Judge Pallmeyer dismissed the garnishment proceeding, vacated the conditional judgment against Starr, and dismissed Starr from the case. Continental Indemnity Co. v. BII, Inc., No. 18-cv-5520, 2023 WL 2333293, at *4 (N.D. Ill. Mar. 1, 2023). The court explained that it lacked subject matter jurisdiction over the garnishment proceeding because it fell outside the scope of the court's ancillary jurisdiction when proceeding under Rule 69. Id. at *2. Because the record showed complete diversity of citizenship between Continental and Starr, the court explained that Continental's "proper course of action is to file a complaint against Starr." Id. at *4. The court invited Continental to notify the Clerk of Court, should it file a complaint against Starr, that the suit was related to the original action against BII so that it could be assigned to the same judge. Id. Instead of filing a new complaint against Starr, Continental appealed the dismissal.

II. Standard of Review

"Subject-matter jurisdiction is the first issue in any case . . . ." Miller v. Southwest Airlines Co., 926 F.3d 898, 902 (7th Cir. 2019). It is axiomatic that federal courts have an independent obligation to ensure that they have subject matter jurisdiction over each case heard, regardless of whether the parties have raised the issue. See Ware v. Best Buy Stores, L.P., 6 F.4th 726, 731 (7th Cir. 2021). This is because "[f]ederal courts are courts of limited jurisdiction. They possess only that power authorized by Constitution and statute . . . ."...