Edward E. Gillen Company v. the Insurance Company of the State of Pennsylvania

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 15‐1323
EDWARD E. G ILLEN C OMPANY,
Plaintiff‐Appellee,
FIDELITY AND D EPOSIT C OMPANY OF MARYLAND,
Intervening Plaintiff‐Appellee,
and
BMO HARRIS BANK N.A.,
Intervening Plaintiff‐Appellant,
v.
T HE INSURANCE C OMPANY OF THE STATE OF PENNSYLVANIA ,
Defendant.
____________________
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 10‐C‐564 — Rudolph T. Randa, Judge.
____________________
A RGUED OCTOBER 28, 2015 — D ECIDED J UNE 16, 2016
____________________
Before W OOD, Chief Judge, and EASTERBROOK and
HAMILTON, Circuit Judges.

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2 No. 15‐1323
EASTERBROOK , Circuit Judge. BMO Harris Bank (the Bank
for short) holds a security interest in almost all assets of Ed‐
ward E. Gillen Company, formerly in the foundation‐
construction business. This appeal presents a multi‐party
dispute about who gets what share of money paid into the
court’s registry by one of Gillen’s insurers.
Gillen failed to perform on a subcontract with Meyne
Company, which in arbitration received a net award of ap‐
proximately $1.8 million. Liberty Mutual, Gillen’s primary
insurer, wrote Meyne a check for $1 million, the policy’s lim‐
it. Meanwhile, Gillen asked a district court to set aside the
arbitrator’s award. Instead the court confirmed the award,
and Gillen appealed to this court. In order to avoid execution
of the judgment, Gillen had to post a supersedeas bond. Fed.
R. Civ. P. 62(d). Fidelity and Deposit Company of Maryland
(F&D) underwrote the bond. The appeal was settled and
dismissed; as part of that agreement, F&D paid Meyne the
remaining $800,000 and stepped into its shoes as Gillen’s
creditor.
Enter The Insurance Company of the State of Pennsylva‐
nia, which the parties call ICSOP and we call the Excess In‐
surer. The Excess Insurer, which had written a policy that
took effect after Liberty Mutual’s was exhausted, paid $1.2
million into the court’s registry. It expresses indifference
about who gets the money. The Bank wants the whole $1.2
million, arguing that its status as a secured creditor puts it
ahead of F&D and Gillen, the other claimants. (Neither Me‐
yne nor Liberty Mutual asserts any interest in the funds.) But
the district court held that $800,000 goes to F&D because it is
subrogated to Meyne’s rights, and Meyne could have collect‐
ed from the Excess Insurer without impairing the Bank’s se‐

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No. 15‐1323 3
curity interest. 2015 U.S. Dist. LEXIS 7870 (E.D. Wis. Jan. 22,
2015). The judge concluded that the other $400,000 belongs
to Gillen and goes to the Bank as its secured creditor.
The Bank contends in this court that it gets the whole $1.2
million for a simple reason: Meyne was Gillen’s unsecured
creditor, and F&D’s subrogation to Meyne’s position makes it
an unsecured creditor too. If the $1.2 million were in Gillen’s
hands, then the superiority of the Bank’s interest would be
incontestable. The Bank insists that this must be true as well
of funds used to retire Gillen’s unsecured debt.
The district court was not persuaded, and neither are we,
because, as a matter of Wisconsin law (which governs this
diversity litigation), insurance bypasses security interests.
Consider what happened with Liberty Mutual’s payment of
the arbitration award’s first $1 million. Liberty Mutual paid
Meyne, and the Bank has never asserted an interest in that
money. Whatever the rule might be elsewhere, Wisconsin is
a direct‐action jurisdiction in which the victim of an insured
wrong can collect from the insurer. See Wis. Stat. §632.24. In
Wisconsin even the insolvency of the client and the presence
of other creditors does not affect the victim’s right to collect.
Wis. Stat. §632.22; Decade’s Monthly Income & Appreciation
Fund v. Whyte & Hirschboeck, S.C., 173 Wis. 2d 665, 676 (1993).
If Meyne could receive the first $1 million without regard
to the Bank’s lien, why not the remaining $800,000? That
Meyne was paid by F&D rather than the Excess Insurer does
not matter. F&D succeeded to Meyne’s position and has the
same rights it did.
The Bank nonetheless insists that, because the Excess In‐
surer wrote a check to the federal court rather than to F&D,

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4 No. 15‐1323
the money must be treated as Gillen’s and subjected to the
Bank’s security interest. Whether that would be so if the Ex‐
cess Insurer had written the check to Gillen is an interesting
question of Wisconsin law, but not one we need resolve. The
money did not enter Gillen’s coffers. It was paid to the feder‐
al court, which concluded that F&D has a claim to $800,000
superior to any claim that Gillen can assert. And if F&D
takes ahead of Gillen, it must come ahead of Gillen’s credi‐
tors, such as the Bank. That would be equally true under
federal bankruptcy law. See, e.g., In re Edgeworth, 993 F.2d 51
(5th Cir. 1993), which holds that under the Bankruptcy Code
insurance proceeds pass to the beneficiaries free of other
creditors’ interests.
The Bank maintains that the Excess Insurer’s payment
wasn’t really insurance. Gillen and the Excess Insurer dis‐
puted how much (if anything) it owed; they settled for $1.2
million. The Bank wants us to treat this as damages for the
bad‐faith denial of insurance coverage, rather than as insur‐
ance proceeds. Yet if an insurer wrongfully delays payment,
and later makes everyone whole, why would the delay di‐
vert the money to a secured creditor rather than the person
who should have received the cash in the first place? “Dam‐
ages” measured by the value of insurance wrongfully de‐
layed are just insurance proceeds by another name.
That is not inevitable, but the Bank does not contend that
Wisconsin sees a difference. This part of its argument does
not rely on any statute or decision from Wisconsin, or any
other state for that matter. The federal court’s job in diversity
litigation is to predict how the state’s highest court would
resolve a legal contention. We are confident that the Su‐
preme Court of Wisconsin would give the beneficiary of an

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No. 15‐1323 5
insurance policy (here F&D as Meyne’s subrogee for
$800,000) the same rights, whether the payment is called “in‐
surance” or “damages for failure to indemnify on time”. Any
amount exceeding the beneficiary’s rights (here the $400,000)
is genuine damages subject to a security interest. That’s ex‐
actly how the district court apportioned this $1.2 million.
A FFIRMED

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