Fidelity & Cas. Co. v. Reserve Ins. Co.

• Decision Date: 14 May 1979
• Docket Number: No. 76-2892,76-2892
• Citation: 596 F.2d 914
• Parties: The FIDELITY & CASUALTY COMPANY of New York, a corporation, Plaintiff- Appellant, v. RESERVE INSURANCE COMPANY et al., Defendants-Appellees. C. W. McGRATH, INC., a corporation, Counter-Claimant, v. NATIONAL INDEMNITY COMPANY et al., Counter-Defendants, National Indemnity Company, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 914

596 F.2d 914

The FIDELITY & CASUALTY COMPANY of New York, a corporation, Plaintiff- Appellant, v. RESERVE INSURANCE COMPANY et al., Defendants-Appellees.

C. W. McGRATH, INC., a corporation, Counter-Claimant, v. NATIONAL INDEMNITY COMPANY et al., Counter-Defendants, National Indemnity Company, Appellee.

No. 76-2892.

United States Court of Appeals, Ninth Circuit.

May 14, 1979.

James L. English, San Francisco, Cal., for plaintiff-appellant.

Charles I. Eisner, Oakland, Cal., Allan Lee Rudick, San Diego, Cal., for defendants-appellees.

Appeal from the United States District Court for the Eastern District of California.

Before DUNIWAY and SNEED, Circuit Judges and SPENCER WILLIAMS ^*, District Judge.

SPENCER WILLIAMS, District Judge:

The Fidelity & Casualty Company of New York appeals from a declaratory judgment entered against it by the district court for the Eastern District of California. On June 18, 1974 the United States filed suit against C. W. McGrath, Inc., who was insured by Fidelity, to recover damages for the cost of suppressing a fire allegedly caused by McGrath on federal lands. Rather than seeking to intervene in that suit Fidelity instituted this separate action against Reserve Insurance Company, another McGrath insurer, for a declaratory judgment as to which policy covered the possible liability to the United States. McGrath and the United States were also named as defendants.

Although the parties do not question the district court's jurisdiction, we see as a major issue the question of whether the court was empowered to hear the case at all. We conclude the district court did not have jurisdiction on the basis alleged in Fidelity's complaint, but that jurisdiction based upon diversity of citizenship would be established by dismissal of the United States as a defendant. Having found a basis for federal jurisdiction we affirm on the merits.

JURISDICTION

Fidelity's first amended complaint asserts jurisdiction under 28 U.S.C. § 1345 which provides in pertinent part: "the district courts shall have original jurisdiction of all civil actions, suits or proceedings commenced by the United States." The district court denied a motion by the government to dismiss for lack of subject matter jurisdiction. It reasoned the United States was a contingent beneficiary of the insurance policies and therefore a necessary party to the litigation; in its view, jurisdiction could be predicated on 28 U.S.C. § 1345 because the government had filed the underlying lawsuit. Whether § 1345 establishes jurisdiction for a suit Against the United States, by drawing its essence from a separate action previously commenced By the United States appears to be a question of first impression.

The Declaratory Judgment Act, 28 U.S.C. § 2201, does not itself confer federal subject matter jurisdiction. Skelly Oil v. Phillips Petroleum,339 U.S. 667, 70 S.Ct. 876, 94 L.Ed. 1194 (1950). In supplementary briefing requested by this court, Fidelity has argued federal jurisdiction over the United States under the Declaratory Judgment Act is proper if there is an indication of waiver of sovereign immunity as to the underlying aspects of the case. Support for this proposition it claims, is found in Pennsylvania R. Co. v. United States, 111 F.Supp. 80 (D.N.J.1953) and Luckenbach Steamship Co. v. United States, 292 F.2d 913, 155 Ct.Cl. 81 (1961).

The Pennsylvania R. Co. case arose from a disastrous explosion in South Amboy, New Jersey that caused damage to some eight to ten thousand persons. The plaintiff railway instituted a declaratory judgment In Luckenbach Steamship Co. v. United States, 292 F.2d 913, 155 Ct.Cl. 81 (1961) the Court of Claims transferred a maritime action to the district court, disregarding the plaintiff's contention it could not obtain declaratory relief against the government in an admiralty proceeding. The court cited the Pennsylvania R. Co. case in a footnote and argued when the United States has established a remedy against itself by statute, a plaintiff may use a declaratory judgment as a procedural device to secure that remedy. 292 F.2d at 916 n.5. These cases are distinguishable because the plaintiff in each instance was authorized by statute to institute a suit in federal court against the United States. Section 1345 authorizes no such action. Neither does it follow that because the United States may have waived its sovereign immunity as to the subject matter of this action, the district court had jurisdiction to decide the matter. See Marcus Garvey Square v. Winston Burnett Const. Co., 595 F.2d 1126 at 1131 (9th Cir. 1979).

action naming all potentially responsible parties as well as representatives of various classes of potential claimants. In part, the plaintiff sought a judgment declaring whether the plaintiff and any other claimants or defendants were entitled to judgment against, or contribution or indemnity from the United States. Noting the plaintiff could sue directly under the Federal Tort Claims Act for damages against the United States, the court held it could entertain a suit for preliminary declaratory relief which was merely a procedural device used to seek a remedy clearly within the scope of the government's waiver of sovereign immunity. 111 F.Supp. at 86.

Generally speaking, when the United States files suit it may subject itself to various compulsory and permissive counterclaims for recoupment or set-off. ¹ This court has been unable, however, to find a case in which jurisdiction has been extended to a separate suit. Similarly, federal jurisdiction pursuant to § 1345 has been found, where the United States was named as a defendant, but sought intervention and was realigned as a plaintiff. State of New Mexico ex rel. Reynolds v. Molybdenum Corp. of America, 570 F.2d 1364, 1366 (10th Cir. 1978). In this case the United States was not realigned as a plaintiff, did not seek to intervene as a plaintiff, and, in fact, sought dismissal of the action. See also Brooks v. Nez Perce County, 394 F.Supp. 869, 872 (D. Idaho 1975). ("Plaintiffs' argument that the United States, as trustee, has the right to bring this action but has not seen fit, giving the plaintiffs, as holders of the beneficial interest, the right to sue, does not alter the fact that this action was not 'commenced by the United States.' ")

Reserve Insurance Company presents an alternative theory to sustain this action based upon principles of ancillary jurisdiction. It argues the only way a complete declaratory judgment, binding upon all the parties including the United States, can be obtained in this controversy is for the federal court to assume subject matter jurisdiction over Fidelity's suit. ²

There appears no question a real controversy allowing declaratory relief exists in this case, Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 61 S.Ct. 510, 85 L.Ed. 826 (1941), or that the United States is a proper party defendant, Franklin Life Ins. Co. v. Johnson, 157 F.2d 653 (10th Cir. 1946). All the same, it does not follow that resolution of the controversy between the insurers is reasonably required for a complete determination of the original suit by the United States against the insured. The basic impediment to the parties' claim for ancillary jurisdiction remains the fact that Fidelity filed a separate lawsuit rather than seeking to intervene in the government's action. Whatever the current parameters of ancillary jurisdiction the doctrine has never extended beyond claims asserted in one action.

From the foregoing we conclude the district court did not have jurisdiction based upon § 1345. However, dismissing a case for want of jurisdiction is not favored when an alternative basis for jurisdiction exists even if the alternative basis was not asserted in the trial court. Title 28 § 1653 provides that "(d)efective allegations of jurisdiction may be amended, upon terms, in the trial or appellate courts." The parties urge this court, if jurisdiction under § 1345 is found lacking, to dismiss the United States and permit amendment of the pleadings to allege diversity jurisdiction.

Federal Rule of Civil Procedure 21 permits "the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just" to add or drop parties so as to avoid dismissing an action. At least one court has permitted such a motion to be made on appeal. Reed v. Robilio, 376 F.2d 392 (6th Cir. 1967). This result is buttressed by the wording of the rule permitting dismissal to occur "at any stage of the action."

In exercising our power under Rule 21 we must determine whether or not the United States is an indispensable defendant. Anrig v. Ringsby United,591 F.2d 485, 491 (9th Cir. 1978). We conclude that it is not. No judgment rendered in this action in the absence of the United States will extinguish any substantial rights it may have. The purpose of this suit is to determine which of the insured's insurance carriers is bound to defend and pay any judgment. The United States is neither the insured nor the insurer; it is, at best, an unnamed contingent beneficiary of the policies. Furthermore, its only current interest in the litigation is academic since its lawsuit against McGrath has been settled and dismissed. On the other hand, the remaining parties respective rights, duties, and obligations can be adjudicated without the presence of the United States.

For these reasons the United States is dismissed from this action and Fidelity is granted leave to amend its complaint to allege diversity jurisdiction as set forth more fully in the parties' briefs.

THE MERITS

The United States suit against C. W. McGrath, Inc. alleges the forest fire was started by a McGrath employee who "negligently operated a welding device without first having adequately cleared away the surrounding flammable vegetation. The fire was ultimately suppressed by the Forest Service at a cost of approximately $157,000. At the...