15 F.3d 371 (4th Cir. 1994), 92-1799, Nautilus Ins. Co. v. Winchester Homes, Inc.

Docket Nº:92-1799.
Citation:15 F.3d 371
Party Name:NAUTILUS INSURANCE COMPANY, Plaintiff-Appellee, v. WINCHESTER HOMES, INCORPORATED, Defendant-Appellant, RELIANCE WOOD PRESERVING, INCORPORATED; Pennsylvania Lumbermen's Mutual Insurance Company; Great American Insurance Company, Defendants-Appellees, v. Martin MULLANEY, Third Party Defendant.
Case Date:February 03, 1994
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit
 
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Page 371

15 F.3d 371 (4th Cir. 1994)

NAUTILUS INSURANCE COMPANY, Plaintiff-Appellee,

v.

WINCHESTER HOMES, INCORPORATED, Defendant-Appellant,

RELIANCE WOOD PRESERVING, INCORPORATED; Pennsylvania

Lumbermen's Mutual Insurance Company; Great

American Insurance Company, Defendants-Appellees,

v.

Martin MULLANEY, Third Party Defendant.

No. 92-1799.

United States Court of Appeals, Fourth Circuit

February 3, 1994

Argued Dec. 1, 1992.

Page 372

ARGUED: Vernon Webster Johnson, III, Jackson & Campbell, P.C., Washington, DC, for Appellant. Robert Lawrence Ferguson, Jr., Thieblot, Ryan, Martin & Ferguson, Baltimore, Maryland, for Appellees. ON BRIEF: Michael J. McManus, Jackson & Campbell, P.C., Washington, DC, for Appellant. Jodi K. Ebersole, Thieblot, Ryan, Martin & Ferguson, Baltimore, Maryland; John Hamilton Johnston, Slenker, Brandt, Jennings & Johnston, Merrifield, Virginia; Thomas J. Minton, Kathryn Miller Goldman, Quinn, Ward & Kershaw, P.A., Baltimore, Maryland, for Appellees.

Before WIDENER and PHILLIPS, Circuit Judges, and SPROUSE, Senior Circuit Judge.

OPINION

PHILLIPS, Circuit Judge:

Winchester Homes, Inc. ("Winchester"), one of several defendants in a declaratory judgment action brought to resolve a dispute over liability insurance coverage, appeals the district court's dismissal of that action, on the eve of trial, in deference to pending state court litigation against the insured on the underlying claims for which coverage is sought. The appeal raises once again the

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difficult question of when a federal district court may decline to entertain a declaratory judgment action that is properly within its jurisdiction because of the pendency of related litigation in the state courts. Winchester also attempts to obtain review of an earlier ruling by the district court--later vacated by that court itself--that denied in part its motion for summary judgment. Because we find that the district court erred in dismissing the declaratory judgment action, we reverse the order of dismissal and remand with instructions to reinstate the action. We decline to review the vacated ruling denying Winchester's motion for summary judgment.

I.

Reliance Wood Preserving, Inc. ("Reliance") is a Maryland corporation that was engaged, prior to its bankruptcy, in the business of producing and distributing fire retardant plywood. In 1988, Nautilus Insurance Company ("Nautilus") issued a general liability insurance policy to Reliance. The policy contained a products liability endorsement, in which Nautilus agreed to indemnify Reliance, within specified limits, for any sums the latter might become legally obligated to pay to third parties as damages for injuries to person or property caused by its products, and to defend it against any actions seeking damages for such injuries. The policy, as renewed, was in effect from July of 1988 until July of 1990.

Winchester is a Delaware corporation that builds townhouses and other residential properties. In November of 1990, Winchester filed two separate products liability actions--one in the Circuit Court for Montgomery County, Maryland; the other in the Circuit Court for Fairfax County, Virginia--against Reliance and 13 other entities allegedly involved in the manufacture and distribution of fire retardant plywood it had used in some townhouses it built and sold during the 1980's. In those actions, Winchester sought damages for property damage and related economic losses allegedly caused it by that plywood, which it claimed had begun to deteriorate after installation. 1 After being notified of Winchester's claims, Nautilus provided Reliance with a defense against them, subject to a full reservation of its rights under the policy.

In February of 1991, some four months after Winchester's state court actions were filed, Nautilus filed this declaratory judgment action in the United States District Court for the District of Maryland. Nautilus sought a declaration that it was not obligated to defend or indemnify Reliance against the claims being asserted by Winchester in the state court actions, contending that the policy was void because of material misrepresentations and omissions made by Reliance in applying for it, and that the claims in question were in any event not within the scope of its coverage. Nautilus named as defendants in this declaratory action its policyholder Reliance, the tort claimant Winchester, and two other insurance companies that had issued liability insurance policies to Reliance, Pennsylvania Lumbermen's Mutual Insurance Company ("PLMIC") and Great American Insurance Company ("GAIC"). 2 The sole basis for federal subject matter jurisdiction was diversity of citizenship. Reliance counterclaimed against Nautilus, seeking a declaration that Nautilus was required to defend and indemnify it in the state court actions, as well as damages for fraudulent misrepresentation.

On June 25, 1991, Reliance filed a petition in bankruptcy, which stayed all litigation, both federal and state, then pending against it. The Bankruptcy Court lifted the automatic stay to allow both the underlying tort actions and this declaratory action to proceed against Reliance. Reliance elected to cease all direct participation in this case, however, and Winchester assumed its interests in it, in order to preserve its own interest in the

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Nautilus policy, which was the only asset in Reliance's estate in bankruptcy and thus Winchester's only hope for satisfying any judgment it might obtain against Reliance in the underlying tort actions. On April 10, 1992, Reliance's estate in bankruptcy formally assigned its interest in the Nautilus policy to Winchester.

After seven months of extensive discovery, Winchester and the three insurance companies each filed motions for summary judgment in this action. The motions were referred to a United States Magistrate Judge, who recommended that Winchester's motion for summary judgment be granted in part, but denied with respect to Nautilus' claim that its policy was void for misrepresentation. The District Court issued an order adopting the Magistrate Judge's recommendations in their entirety, including the denial of Winchester's motion for summary judgment on the void-for-misrepresentation issue.

On April 20, 1992, one week before trial was scheduled to begin, GAIC moved to dismiss this action because of the pendency of the underlying tort actions in state court, citing our recent decision in Mitcheson v. Harris, 955 F.2d 235 (4th Cir.1992). The district court granted the motion and dismissed this action, over the objection of Nautilus and Winchester, on the authority of Mitcheson. In its order of dismissal, the district court expressly vacated all of its prior rulings in the case, including its denial of Winchester's motion for summary judgment on the void-for-misrepresentation issue.

Winchester filed this timely appeal from the order of dismissal. GAIC, now joined by PLMIC and Nautilus, has moved to dismiss the appeal for lack of jurisdiction. We deferred ruling on that motion until oral argument on the appeal.

II.

At the outset, we must address the motion to dismiss the appeal for lack of jurisdiction. In that motion, GAIC contends that Winchester lacks standing to appeal the order dismissing the declaratory action, because it was not aggrieved by that order. It points out that Winchester was a defendant in the declaratory action, rather than a plaintiff; that it never filed any sort of counterclaim or cross-claim seeking affirmative relief in its own behalf; and that it had in fact urged the district court, both in its answer and in a later motion for judgment on the pleadings, to dismiss it from the action. As a result, GAIC contends, Winchester was not sufficiently aggrieved by the order of dismissal to be entitled to take an appeal from it.

We disagree. It is true that Winchester has never asserted any claims for affirmative relief in its own name in this action, and that it originally sought to have itself dismissed from the action. These facts do seem at first blush to suggest that Winchester was not sufficiently aggrieved by the order of dismissal to be entitled to appeal from it. See Deposit Guaranty Nat'l Bank v. Roper, 445 U.S. 326, 333, 100 S.Ct. 1166, 1171, 63 L.Ed.2d 427 (1980) (ordinarily, party may not appeal from a judgment or order of a district court unless he is aggrieved by it, and party is generally not aggrieved by a judgment that awards it all of the relief it seeks); 9 J. Moore, B. Ward & J. Lucas, Moore's Federal Practice p 203.06 (2d ed. 1993), at 3-26 through 3-27 (same). But first impressions are often deceptive, and on closer examination, we are satisfied that Winchester was in fact aggrieved by the order it now seeks to appeal.

GAIC's argument ignores the fact that Winchester's position in this lawsuit changed dramatically between the time it filed its answer and motion for judgment on the pleadings urging dismissal and the time the district court issued the order of dismissal from which it now seeks to appeal. After Reliance filed a petition in bankruptcy and assigned all of its rights in the Nautilus policy to Winchester, Winchester, as assignee of Reliance's rights against...

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