750 F.2d 267 (3rd Cir. 1984), 84-3094, Charter Oak Fire Ins. Co. v. Sumitomo Marine and Fire Ins. Co., Ltd.

Docket Nº:84-3094.
Citation:750 F.2d 267
Party Name:CHARTER OAK FIRE INSURANCE COMPANY, Appellant, v. SUMITOMO MARINE AND FIRE INSURANCE COMPANY, LTD.
Case Date:December 17, 1984
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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Page 267

750 F.2d 267 (3rd Cir. 1984)

CHARTER OAK FIRE INSURANCE COMPANY, Appellant,

v.

SUMITOMO MARINE AND FIRE INSURANCE COMPANY, LTD.

No. 84-3094.

United States Court of Appeals, Third Circuit

December 17, 1984

Argued Oct. 2, 1984.

Page 268

John M. Wolford (argued), A. Elizabeth Baldwin, MacDonald, Illig, Jones & Britton, Erie, Pa., for appellant.

John M. McLaughlin (argued), Thomas A. Tupitza, Knox, Graham, McLaughlin, Gornall & Sennett, Inc., Erie, Pa., for appellee.

Before ALDISERT, Chief Judge, and HUNTER, and WEIS, Circuit Judges.

OPINION

JAMES HUNTER, III, Circuit Judge:

Appellant Charter Oak Fire Insurance Co. ("Charter Oak") appeals the order of the district court entering judgment in favor of appellee Sumitomo Marine and Fire Insurance Co. ("Sumitomo"). Charter Oak, appellant in this case, insured John D. Wodarski and Wodarski Sled and Cycle Shak, and Sumitomo, appellee, insured Yamaha Motor Co. Charter Oak settled a judgment against its insured in a state court action in which Raymond Peterson sued Wodarski and Yamaha for damages resulting from a snowmobile accident. In this diversity case Charter Oak asserts that Sumitomo wrongfully failed to defend it in the action and indemnify it for the amount paid in settlement. The district court conducted a bench trial in the case and entered an order dismissing

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Charter Oak's action on the basis of collateral estoppel.

Peterson sued Wodarski, an authorized dealer in products designed and manufactured by Yamaha, and Yamaha, in the Common Pleas Court of Erie County, Pennsylvania for injuries sustained by him while operating a snowmobile manufactured by Yamaha and sold to him by Wodarski. Peterson asserted both a negligence claim and a strict liability claim, alleging that the snowmobile had a defective throttle mechanism.

Yamaha was insured under a comprehensive general liability policy containing a broad form vendor's endorsement, issued by Sumitomo, and Sumitomo retained counsel and managed Yamaha's defense. Similarly, Charter Oak and its counsel controlled Wodarski's defense. The same counsel represent Sumitomo and Charter Oak in this action. In the state action, counsel for Wodarski answered Peterson's complaint and included New Matter under Pa.R.C.P. 2252(d), joining Yamaha in the nature of a cross-claim for contribution and/or indemnity. In the cross-claim Wodarski asserted that if it was held liable to Peterson by reason of selling a defective snowmobile, then Yamaha was liable to it for all damages, and costs of defense. App. at 402. In this federal court diversity action, Charter Oak again claims reimbursement and indemnity, this time from Sumitomo alone, rather than from Sumitomo through its insured, Yamaha. In addition, Charter Oak asks for damages arising from Sumitomo's failure to defend it in the state court action. 1

At the conclusion of all testimony in the state court litigation, the court of common pleas directed a verdict for Yamaha against Peterson in the underlying tort action and for Yamaha against Wodarski in the cross-claim for indemnity and defense. After a six-day trial, the jury returned a verdict for Peterson against Wodarski for $250,000.00. Wodarski filed posttrial motions contesting both the jury verdict against it and the dismissal of its cross-claim. After the state court denied the motions, Wodarski appealed, then settled with Peterson and withdrew its appeal.

The record clearly indicates the reasons for the various dispositions in the state court action. The evidence showed that the snowmobile came from Yamaha in an undefective condition and that while it was in Wodarski's possession and control, persons employed by Wodarski took apart the throttle and then improperly reassembled it. The jury's verdict against Wodarski necessarily rested on a finding that the misassembly caused the throttle to stick and that the sticking of the throttle caused the accident, since this was the only theory of liability presented.

The insurance policy between Sumitomo and Yamaha contained a vendor's endorsement which excluded coverage for "(b) bodily injury or property damage arising out of (i) any physical or chemical change in the form of the product made intentionally by the vendor, or (ii) demonstration, installation, servicing or repair operations, except

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such operations performed at the vendor's premises in connection with the sale." App. at 20. Charter Oak bases this action for indemnity on the vendor's endorsement, which was available to it during the state trial.

The district court properly dismissed Charter Oak's claim under section (b)(i) of the vendor's endorsement. In its pretrial submissions, Charter Oak admits that the injury did not occur during a demonstration, servicing or repair in connection with the sale of the snowmobile. App. at 144. The district court likewise correctly concluded that application of finality of judgments principles preclude appellant from claiming in federal court that it is covered at all under the vendor's endorsement.

The law has developed the doctrines of collateral estoppel and res judicata in order to "protect ... adversaries from the expense and vexation attending multiple lawsuits, conserve judicial resources, and foster reliance on judicial action by minimizing the possibility of inconsistent decisions." Montana v. United States, 440 U.S. 147, 153-54, 99 S.Ct. 970, 973-74, 59 L.Ed.2d 210 (1979). These interests are implicated when, as in this case, nonparties control the litigation in the first action, and then sue in their own right in the second. Litigating nonparties simply are not "strangers to the cause." Id. at 154, 99 S.Ct. at 974. Although Sumitomo and Charter Oak were not technically "parties" to the state court action, they did control the litigation. The Supreme Court has stated that "one who prosecutes or defends a suit in the name of another to establish and protect his own right, or who assists in the prosecution or defense of an action in aid of some interest of his own ... is as much bound ... as he would be if he had been a party to the record." Souffront v. Compagnie Des Sucreries, 217 U.S. 475, 487, 30 S.Ct. 608, 612, 54 L.Ed. 846 (1910).

Because this is a diversity case, the district court correctly looked to Pennsylvania law in applying finality of judgment principles. The court did not, however, identify the correct theory of preclusion. Under Pennsylvania law, Charter Oak is barred from bringing the action for indemnity by virtue of res judicata, not collateral estoppel. The Supreme Court of Pennsylvania, in Williams v. Lumbermen's Ins. Co. of Philadelphia, 332 Pa. 1, 5-6, 1 A.2d 658, 660-61 (1938), held that one who controls or substantially participates in the presentation on behalf of a party is bound by the judgment in that action and is barred from bringing another action upon the same claim. See also Estate of Flinn, 479 Pa. 312, 322, 388 A.2d 672, 677 (1978) (citing Lumbermen's for proposition that "one not a party to litigation may be bound by it if he openly and actively, with notice to adverse party, assumes and manages the litigation.").

Charter Oak controlled the litigation in the state court and asserted the same claim for indemnity in its cross-claim against Yamaha as it asserts here. In defining the "cause of action" for purposes of preclusion under res judicata, the fact that the state court cross-claim may, as characterized by Judge Weis, have asked for relief under a common law theory of...

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