Attempt to Avoid State Court Judgment in Federal Court Fails

In In Re: Robert Lodholtz, et al. (2014 U.S. App. LEXIS 19107), insurer Granite State Insurance Company attempted, desperately, to avoid defending and indemnifying its insured, Pulliam Enterprises.  After being denied relief in state court, Granite sought relief in federal court based on the same argument. Lodholtz had brought suit in Indiana state court for injuries he sustained while working at Pulliam’s plant.  Granite declined to defend Pulliam, claiming Lodholtz proper recovery was through workers’ compensation.  Lodholtz moved for default judgment after Pulliam failed to file an answer, but agreed not to execute the judgment in return for Pulliam’s assignment of rights against Granite.  Granite moved to intervene, never changing their argument, but the trial court denied the motion.  The court entered judgment for Lodholtz for nearly $4 million.

Granite quickly filed suit in Indiana federal district court, for a declaratory judgment finding no duty to indemnify Pulliam.  One month later, Granite also appealed the trial court’s denial to intervene.  The court of appeals affirmed the denial, pointing out that Granite wanted to reserve the right to avoid reimbursement by showing no duty to indemnify Pulliam.  Under Indiana law, an insurer cannot control the defense of the insured without acknowledging coverage.

Surprisingly, although based on the same workers’ compensation argument, the federal court agreed with Granite and held that the state court judgment should be disregarded.  Granite then petitioned the Seventh Circuit for permission to appeal the state court order denying intervention, on the grounds that it would resolve the entire litigation.

The Seventh Circuit granted the petition.  The question before the court was whether it could ignore the state court judgment based on the state court lacking jurisdiction.  Under Fed. R. Civ. P. 60(b)(4) and 60(d)(1), a federal district court can relieve a party from final judgment in an independent action if the judgment is void.  The Court held that Granite had the ability to argue the state court lacked jurisdiction and did.  Had they forfeited their reservation of rights, they would have been granted intervention.

The Seventh Circuit reversed the federal court judgment and dismissed Granite’s suit.