868 F.3d 542
7th Cir.2017Background
- Novae issued an insurance policy covering Fairfax and Cunningham; the policy had a $1 million retention and did not obligate Novae to defend Cunningham in the underlying Texas suit.
- American Patriot and Diane Hendricks sued Cunningham in Texas for negligent claims-handling; the Texas litigation persisted for years while Novae remained largely uninvolved and later denied coverage.
- In 2012 Cunningham, Hendricks, and the American Patriot bankruptcy trustee executed a Settlement Agreement: Cunningham stipulated to a $5.12 million judgment, assigned its claim against Novae to Hendricks (effective upon entry of the judgment), and Hendricks covenanted not to execute the judgment against Cunningham.
- The Texas court entered the stipulated judgment; Hendricks then sued Novae in Illinois federal court as assignee of Cunningham’s coverage claim.
- Novae moved for summary judgment arguing (1) the assignment violated Texas public policy (collusive settlement/assignment) and (2) the Texas stipulated judgment is not binding on the insurer; the district court agreed the judgment was not binding and entered judgment for Novae.
- The Seventh Circuit affirmed, holding Texas law governs and the settlement-and-assignment is invalid under Texas public policy (Gandy line) and the stipulated judgment is inadmissible/binding on the insurer.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Choice of law for validity of the assignment | The parties selected Illinois law in the settlement; that choice should control. | Texas has a materially greater interest because the agreement centered on resolving Texas litigation; Texas law should apply. | Texas law governs (Illinois choice-of-law clause overridden because Texas has materially greater interest). |
| Enforceability of pretrial settlement/assignment of insurer claim | Hendricks: assignment is valid; Gandy requires the insurer to have tendered a defense to invalidate — Novae did not tender a defense here. | Novae: the settlement-and-assignment is collusive, distorts litigation incentives, and violates Texas public policy per Gandy and its progeny. | Assignment invalid under Texas public policy; stipulated judgment not binding on insurer and inadmissible as evidence of damages. |
Key Cases Cited
- State Farm Fire & Casualty Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996) (announces Texas rule invalidating pretrial defendant-to-plaintiff assignments of insurer claims that prolong litigation and distort incentives)
- Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008) (directs courts to assess whether an assignment fits within Gandy’s formal bounds and whether Gandy’s rationale applies)
- Fulcrum Fin. Partners v. Meridian Leasing Corp., 230 F.3d 1004 (7th Cir.) (choice-of-law principles: forum follows its own rules and enforces contract choice-of-law unless exceptions apply)