IL 2nd Dist. – Peppers Doctrine

Stay of Coverage Action Appropriate When Issues of Ultimate Fact in Underlying Action Not Yet Finally Resolved

On interlocutory appeal, an Illinois court, applying Illinois law, reversed the trial court’s ruling denying a motion to stay a coverage proceeding pending the resolution of the underlying litigation.  The appellate court found that the trial court’s order establishing liability was not final because it did not include a finding on damages and, thus, a determination in the coverage dispute could decide an issue of ultimate fact that was not yet decided in the underlying litigation.

In the underlying litigation, David John sued Wheaton College for public disclosure of private facts and tortious interference.  In response, Wheaton College filed a counterclaim alleging defamation.  The trial court dismissed John’s complaint and Wheaton College voluntary dismissed its counterclaim.  A year later, Wheaton College filed a four-count complaint against John, alleging defamation per se, false light invasion of privacy, civil conspiracy, and malicious prosecution.   Subsequently, the appellate court reversed the trial court’s order dismissing John’s public disclosure of private facts claim.  John then first notified his liability umbrella insurer, State Farm Fire & Casualty Company (“State Farm”), of Wheaton College’s complaint.  State Farm accepted the defense of the claims against John subject to a reservation of rights.   A few months later, the trial court sanctioned John for failing to comply with discovery obligations.  The trial court dismissed with prejudice John’s claims against all parties and entered default judgment against John for all of Wheaton College’s claims.  The trial court then set a prove-up hearing on damages.

State Farm filed a complaint for declaratory judgment regarding its duties to defend and indemnify John in the underlying litigation.  In its complaint, State Farm alleged that John failed to comply with its policy’s notice provisions and that John breached the policy’s cooperation clause.  State Farm also alleged that John was not covered for malicious prosecution under the insurance policy because of the policy’s intentional conduct exclusion.   John filed a motion to dismiss State Farm’s complaint or, in the alternative, to stay the proceedings.  John argued State Farm had a duty to defend him against Wheaton College’s malicious prosecution claim based on an “eight corners analysis” of the underlying complaint and policy.  John also argued that declaratory judgment was premature because it would require a determination of ultimate facts still in dispute in the underlying action.  Moreover, John alleged that there was no actual controversy between State Farm and himself regarding the duty to indemnify until he was legally obligated to pay damages in connection with the underlying litigation. The trial court denied John’s motion to dismiss and declined to stay the proceedings.  The trial court later clarified that the request for a stay was denied without prejudice.  The trial court explained: “I mean, if we get down the road and the matter is close to trial I will probably stay it until after the trial takes place,  But that’s— Maybe I shouldn’t have even said that.”  John filed an interlocutory appeal regarding his motion to stay the proceedings.

On appeal, John argued that the trial court erred in denying his motion to stay because no actual controversy existed as to indemnity because there had been no final damages judgment in the underlying litigation and because the coverage issues were not separable from the issues to be decided in the underlying litigation.  While the appellate court disagreed that there was no actual controversy between the parties, it concluded that the trial court abused its discretion and erred in declining to stay the proceedings based on the Peppers doctrine.   “[U]nder the Peppers doctrine, it is generally inappropriate for a court considering a declaratory judgment action to decide issues of ultimate fact that could bind the parties to the underlying litigation.”  The appellate court found that “[t]he concerns raised by the court in Peppers apply with equal force in the present case.”  According to the appellate court, “[a] default judgment is comprised of two factors: (1) a finding of the issues for the plaintiff; and (2) an assessment of damages.”  Thus, the court’s sanction order was not final because it did not include an assessment of damages.  The appellate court held that while the sanctions order remained interlocutory, it could not accept State Farm’s contention that liability had been established because it was possible that the trial court could reverse the sanctions order.   The appellate court voiced concern that if in the coverage case the intentional conduct exclusion was applied because John was found to have acted with specific intent , but the court in the underlying action were to later vacate the sanctions order, the finding of specific intent in the coverage case could affect the underlying litigation.  Likewise, the appellate court held that, while State Farm’s claim with regard to late notice was not premature, it was still appropriate to stay the entire proceeding because: (1) the “declaratory judgment statute is not ‘intended to facilitate piecemeal litigation,’” (2) the underlying court proceedings were likely to be concluded soon, and (3) the trial court recognized that the proceedings would eventually have to be stayed.  State Farm Fire & Casualty Company v. David John, 2017 IL App (2d) 170193 (June 14, 2017).