Allstate Insurance Company v. Charneski

Citation286 F.2d 238
Decision Date19 December 1960
Docket NumberNo. 13076.,13076.
PartiesALLSTATE INSURANCE COMPANY, an Illinois Corporation, Plaintiff-Appellee, v. Leonard CHARNESKI, Edwin Charneski, Laverne Gehrt, Bertha Mech, Arthur Mech, and Heritage Mutual Insurance Company, a Wisconsin Insurance Corporation, Defendants-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Richard P. Tinkham, of Smith, Puchner, Tinkham & Smith, P. L. Crooks, of Crooks & Crooks, Wausau, Wis., for appellants.

Hiram D. Anderson, Jr., of Peickert, Anderson & Fisher, Stevens Point, Wis., Ralph M. Lauer, Clintonville, Wis., for appellee.

Before HASTINGS, Chief Judge, and KNOCH and CASTLE, Circuit Judges.

HASTINGS, Chief Judge.

Allstate Insurance Company, plaintiff-appellee, instituted this diversity action in the United States District Court for the Western District of Wisconsin. Allstate sought a declaratory judgment that it provided no insurance coverage for the 1950 Ford automobile operated by defendant, Leonard Charneski, at the time of a collision with an automobile driven by defendant, LaVerne Gehrt. Leonard Charneski's brother, Edwin, who claimed ownership of the 1950 Ford, the passengers in the Gehrt automobile, and the insurer of the Gehrt automobile were joined as defendants. A motion by defendants to dismiss the complaint for failure to state a claim upon which relief could be granted was denied. By defendants' answers issue was joined on the question of ownership of the Ford automobile, and the case proceeded to jury trial. The jury found that Leonard Charneski was the owner of the 1950 Ford at the time of the collision, and a declaratory judgment was entered as prayed by Allstate. Defendants moved to alter or amend the judgment or for a new trial. The motion was denied, and defendants appealed.

The contested issues presented by this appeal are:

(1) Whether an action will lie under the federal Declaratory Judgments Act to determine insurance coverage involving an automobile accident in the State of Wisconsin.

(2) Whether there was credible evidence from which the jury could conclude that ownership of the automobile was in Leonard Charneski.

(3) Whether comments, statements and questions by the trial judge or erroneous instructions require a new trial.

We shall first consider the question raised in contested issue No. 1 above set out.

It is conceded that plaintiff could not maintain such an independent action in a Wisconsin state court. This is so because of the holding of the Supreme Court of Wisconsin in New Amsterdam Casualty Co. v. Simpson, 1941, 238 Wis. 550, 555, 300 N.W. 367, 369, wherein it is said:

"Thus, plaintiff under the rule in Wisconsin is directly liable to the injured party if its policy applies. When sued by the injured party it has not only the defense that the insured was not negligent but the defense that the policy did not cover the driver of the car. It is to be emphasized that the latter is not merely a defense against any claims of the insured but a separate and distinct plea in bar to a separate and distinct cause of action asserted by the injured party. Hence, the injured party with a cause of action directly against the insurer is in a real, as well as a technical sense, the principal adversary of the insurance company upon this issue. This makes the situation quite different from the case of the ordinary indemnity or liability policy where the injured party merely resorts to the policy as an asset of the insured. What plaintiff is proposing to do here is to isolate one defense against an injured plaintiff and to try it in advance, leaving undisposed of the issues involving the tortfeasor\'s negligence. It is plain from the face of the complaint that a declaration upon this issue would not necessarily terminate the controversy between the insurer and the injured persons. On the contrary, it could easily do what declaratory judgments are designed to avoid: Result in separate trials between the same parties of issues bearing upon the same cause of action and a long delay before the merits of a claim for personal injury could be examined and fully disposed of by a court. This would contravene the legislative policy heretofore declared by secs. 85.93 and 260.11 which permit the injured party to sue insurer directly and to have all issues determined in a single action." (Emphasis added.)

As is shown in New Amsterdam, unlike the practice in many other states, under Wisconsin statutes, in a negligence action the insurance carrier is made directly liable to the injured party; and the plaintiff in such an action may join an insurance company in any action on account of any claim against the insured. In Elliott v. Indemnity Ins. Co., 1930, 201 Wis. 445, 230 N.W. 87, it was held that the insured was not even a necessary party to an action for damages brought directly against the insurer for the negligent operation of the automobile.

Thus, the Supreme Court of Wisconsin has declared it to be the public policy of that state that an insurance company may not bring a separate declaratory judgment action under the Wisconsin Uniform Declaratory Judgments Act1 as being in contravention of the legislative policy declared in its direct action statute. Such state policy commands that all issues arising in a negligence action, including insurance policy coverage, be determined in a single action.

In the instant case we are required to determine whether in a diversity action under the federal Declaratory Judgments Act, 28 U.S.C.A. § 2201, a federal district court can assume jurisdiction in contravention of the declared state policy of Wisconsin. The resolution of this question brings into play the applicability of the doctrine of Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188.

In 1938, the Supreme Court reversed a century of precedent, established in Swift v. Tyson, 1842, 16 Pet. 1, 10 L.Ed. 865, which had held that except where state statutes controlled, the law to be applied in diversity cases was federal common law. The Court, in Erie R. Co. v. Tompkins, held that constitutionally there could be no federal common law establishing rules of decision for diversity cases.2 Henceforth, the Court stated, the rules of decision to be applied in diversity cases were state statutes and state common law. Such a result discouraged forum shopping between the state court and a federal district court sitting in the same state; it promoted uniformity within the state. The basis of the decision was two-fold: First, constitutional theory that Article III of the Constitution gives to federal courts power to "make law" only in those areas which are delegated to federal legislative authority under Article I. Second, the statutory interpretation in Swift v. Tyson of Section 34 of the Federal Judiciary Act, 28 U.S. C.A. § 1652, limiting the definition of "law" to statutes and excluding court-made common law, was reversed.

The Erie decision became characterized as requiring federal courts to apply the substantive law of the state. However, much has been written since 1938 dealing with the complexities of the Erie decision. To a large degree, these decisions have focused on the problem of when it is necessary, under the Erie doctrine, for federal courts to adopt state rules of decision which are concededly "procedural" in other contexts. Such being the case, under the current standards set by Supreme Court decisions, the simple "substantive-procedural" classification will not suffice.

In Klaxon Co. v. Stentor Elec. Mfg. Co., 1941, 313 U.S. 487, 496-497, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477, the Supreme Court held that under Erie, a federal district court must refer to the state's conflict of law rules, rather than apply a "general law" of conflicts. Speaking for the Court, Mr. Justice Reed said:

"We are of opinion that the prohibition declared in Erie R. Co. v. Tompkins, 304 U.S. 64 58 S.Ct. 817, 82 L.Ed. 1188, against such independent determinations by the federal courts, extends to the field of conflict of laws. The conflict of laws rules to be applied by the federal court in Delaware must conform to those prevailing in Delaware\'s state courts. Otherwise the accident of diversity of citizenship would constantly disturb equal administration of justice in coordinate state and federal courts sitting side by side. See Erie R. Co. v. Tompkins, supra 304 U.S. at 74-77 58 S.Ct. at pages 820-822. Any other ruling would do violence to the principle of uniformity within a state upon which the Tompkins decision is based. Whatever lack of uniformity this may produce between federal courts in different states is attributable to our federal system, which leaves to a state, within the limits permitted by the Constitution, the right to pursue local policies diverging from those of its neighbors. It is not for the federal courts to thwart such local policies by enforcing an independent `general law\' of conflict of laws. Subject only to review by this Court on any federal question that may arise, Delaware is free to determine whether a given matter is to be governed by the law of the forum or some other law."

In Guaranty Trust Co. v. York, 1945, 326 U.S. 99, 108-110, 65 S.Ct. 1464, 1469, 89 L.Ed. 2079, the Court in examining the effect, under the Erie doctrine, of a state statute of limitations to a federal equity case, recognized the futility of the mechanical approach of applying the labels of "substantive" and "procedural" rules. In this context the observations of Mr. Justice Frankfurter are pertinent:

"Matters of `substance\' and matters of `procedure\' are much talked about in the books as though they defined a great divide cutting across the whole domain of law. But, of course, `substance\' and `procedure\' are the same key-words to very different problems. Neither `substance\' nor `procedure\' represents the same invariants. Each implies different variables depending upon the particular problem for which it is used. * * *
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