AJ Kellos Const. Co., Inc. v. Balboa Ins. Co.

• Decision Date: 12 March 1980
• Docket Number: Civ. A. No. 177-194.
• Parties: A. J. KELLOS CONSTRUCTION CO., INC., Plaintiff, v. BALBOA INSURANCE COMPANY and Celotex Corporation, Defendant, v. ROOFING SPECIALTIES, INC. et al., Third-Party Defendants.
• Court: U.S. District Court — Southern District of Georgia

495 F. Supp. 408

A. J. KELLOS CONSTRUCTION CO., INC., Plaintiff, v. BALBOA INSURANCE COMPANY and Celotex Corporation, Defendant, v. ROOFING SPECIALTIES, INC. et al., Third-Party Defendants.

Civ. A. No. 177-194.

United States District Court, S. D. Georgia, Augusta Division.

March 12, 1980.

COPYRIGHT MATERIAL OMITTED

Jay M. Sawilowsky, C. James Jessee, Jr. L/C Jessee, Ritchie & Duncan, P. C., Atlanta, Ga., for plaintiff.

DeWitte Thompson, Atlanta, Ga., James T. Wilson, Augusta, Ga., James A. Eichelberger, Daniel A. Angelo, Greene, Buckley, DeRieux & Jones, Atlanta, Ga., for defendant Celotex.

Lamar W. Davis, Jr., Savannah, Ga., for third-party defendants Roofing Specialties, Inc., Colin Frances Martin, Sarah Inez Martin.

J. Samuel Choate, Jr., Augusta, Ga., for third-party defendants Denson Harris Fraser and Deborah Wheeler Fraser.

ORDER ON MOTION TO DISMISS OF DEFENDANT CELOTEX

BOWEN, District Judge.

Plaintiff, A. J. Kellos Construction Co. Kellos, was the general contractor for the construction of the Research and Education Building at the Medical College of Georgia in Augusta, Georgia. Kellos entered into a subcontract with Roofing Specialties, Inc., for the construction of the roof of this project. A performance bond was executed by Defendant, Balboa Insurance Co. Balboa, in favor of plaintiff that Roofing Specialties, Inc. would promptly and faithfully perform its contract. The roofing system was subsequently condemned by the architect for the state of Georgia, the building's owner.

Kellos brought this action against Balboa on the performance bond, alleging that Roofing Specialties, Inc. defaulted under its contract. Thereafter, Balboa instituted a third party action against indemnitors under the bond executed in favor of plaintiff. By amended complaint, Celotex Corporation Celotex, the supplier of the roofing material, was added as a party defendant.

Currently pending is defendant Celotex's motion to dismiss. The first of several contentions raised by this motion challenges the subject matter jurisdiction of the Court pursuant to Fed.R.Civ.P. 12(b)(1).

I

The basis for subject matter jurisdiction of this action is diversity of citizenship. 28 U.S.C. § 1332(a) (1976). Both Kellos and Roofing Specialties, Inc., as Georgia corporations with their principal place of business in Georgia, are citizens of the state of Georgia for purposes of diversity. Balboa, as a California corporation with its principal place of business in California, is a citizen of California for purposes of diversity. 28 U.S.C. § 1332(c) (1976). Ostensibly, given this statutory definition of corporate citizenship, diversity exists between Kellos and Balboa. Yet Celotex argues that under the proviso of section 1332(c), Balboa's citizenship is deemed that of Roofing Specialties, Inc. thereby defeating diversity of citizenship.

Section 1332(c) provides in pertinent part:

that in any direct action against the insurer of a policy or contract of liability insurance, whether incorporated or unincorporated, to which action the insured is not joined as a party-defendant, such insurer shall be deemed a citizen of the State of which the insured is a citizen, as well as of any State by which the insurer has been incorporated and of the State where it has its principal place of business.

Celotex contends that the bond executed by Balboa in favor of Kellos is a "contract of liability insurance," and that Kellos' suit is a "direct action" to which Roofing Specialties, Inc., "the insured," has not been joined as a party defendant. Thus, it is claimed that under the statutory fiction of the section 1332(c) proviso, Balboa and Kellos are citizens of the same state.

The proviso was originally enacted to relieve congestion in the federal courts caused by direct action statutes in Louisiana and Wisconsin and to prevent duplication of the problem.¹ This framework of enactment, however, has not circumscribed judicial application of section 1332(c); courts have liberally construed the statute to effect the legislative intent that nominally diverse actions be denied a federal forum. See O. M. Greene Livestock Co. v. Azalea Meats, Inc., 516 F.2d 509 (5th Cir. 1975); McMurry v. Prudential Property & Cas. Ins., 458 F.Supp. 209 (E.D.Mich.1978). Yet this statutory construction does not negate the three elements necessary to invoke the proviso: (1) a policy or contract of liability insurance; (2) a direct action against an insurer; and (3) the insured is not a party-defendant. 458 F.Supp. at 210-11. The third factor is not in issue.

A contract of liability insurance is defined as a contract that indemnifies against the condition of becoming liable. Vines v. United States Fidelity & Guaranty Co., 267 F.Supp. 436, 437 (E.D.Tenn.1967). The appropriate inquiry, therefore, is whether a performance bond is a contract that indemnifies against the condition of becoming liable.

Generally, a suretyship is a tripartite agreement between the surety, the principal, and the creditor "where one person has undertaken an obligation and another person is also under an obligation or other duty to the obligee, who is entitled to but one performance, and as between the two who are bound, one rather than the other should perform."² Restatement of the Law of Security § 82, at 228 (1941). The surety in a performance bond guarantees that the principal will perform the contract, and if the principal defaults, the surety shall pay damages in the amount of the bond. 17 Am.Jur. § 1, at 192 (1964).

A contract of indemnity ordinarily contemplates two parties—the indemnitor and the indemnitee. The relationship is defined as "one where the promisor agrees to save a promisee harmless from some loss, irrespective of the liability of a third person." Restatement, Security § 82, comment 1, at 236; see generally Lee Way Motor Freight v. Yellow Transit Lines, Inc., 251 F.2d 97 (10th Cir. 1957). When the contract indemnifies against liability, the indemnitor is normally bound to pay an amount of money to insulate the indemnitee from harm or injury.

Indemnity differs from suretyship in several respects beyond the number of parties necessary to form the relationship. Suretyship is a relationship collateral to a main contract or transaction between the principal and the creditor. See Madison County Farmers Ass'n v. American Employers Ins. Co., 209 F.2d 581 (8th Cir. 1954); Restatement, Security § 82, comments b through e, at 229. Indemnity, in contrast is an original undertaking. See 41 Am.Jur. § 4, at 689. Furthermore, as succinctly stated by Judge Merrill in Atterbury v. Carpenter, 321 F.2d 921, 923-24 (9th Cir. 1963):

"The indemnitor's promise is not conditioned upon another's nonperformance of duty." Arant on Suretyship, § 17 (1931). Liability insurance is the typical example.

The surety, however, promises to protect the promisee only in case a third party, who is primarily liable on the obligation, fails to perform. The creditor-promisee is entitled to compensation from the surety only in the event of default by the principal debtor. Emphasis added.

Thus, a central point of distinction is that the indemnitor's obligation arises upon the occurrence of a stated contingency irrespective of a third party's default — "whether or not the indemnitee has any recourse against a third person." Restatement, Security § 82, comment 1, at 236.

This last differential is evident in cases applying the section 1332(c) proviso. A review of those decisions reveals that, in conformance with the Atterbury court's denomination of liability insurance, supra, the liability or obligation of the defendant which was the subject matter of the complaint was not dependent upon a third party's nonperformance of duty. For example, the proviso has been applied to defeat diversity jurisdiction in an action by an employee against his employer's workman's compensation carrier. Hernandez v. Travelers Ins. Co., 489 F.2d 721 (5th Cir. 1974); Lane v. Insurance Co. of North Am., 268 F.Supp. 345 (E.D.Tenn.1967); Vines v. United States Fidelity & Guaranty Co., 267 F.Supp. 436 (E.D.Tenn.1967). It is fairly uniformly recognized that recovery by the injured employee is not conditioned upon the fault of the employer. See Black v. Texas Employers Ins. Ass'n, 326 F.2d 603 (10th Cir. 1964); Massey v. Thiokol Chemical Corp., 368 F.Supp. 668 (S.D.Ga.1973); McKenney v. Capitol Crane Corp., 321 F.Supp. 880 (D.D.C.1971).

Consonant with suretyship, Balboa's obligation under the bond executed in favor of Kellos was contingent on the default of the principal Roofing Specialties, Inc.³ — an undertaking distinct from indemnity. The relationship, therefore may not properly be characterized as a contract that indemnifies against the condition of becoming liable. Vines v. United States Fidelity & Guaranty Co., supra. Thus, in the terminology of the section 1332(c) proviso, the bond may not be defined as a contract of liability insurance.⁴ This conclusion forecloses application of the proviso and renders analysis of the direct action requirement unnecessary.

II

The complaint against Celotex alleges that tests performed by the state of Georgia, the building's owner, showed that the roofing material delivered by Celotex did not conform with the material designated and described in the contract between Kellos and Roofing Specialties, Inc. Celotex argues in its motion to dismiss that the pivotal factual issue raised by Kellos' complaint is whether the state was justified in condemning the building — whether the roofing material, contrary to the condemnation, met the contract specifications. It is claimed that, given the centrality of this issue, the state of Georgia is an indispensable party to this action under Fed.R.Civ.P. 19(b).

Consideration of joinder under Rule 19 entails a twofold inquiry: (1) whether the party should be joined if feasible; and (2) whether, if joinder is not possible, the action should be dismissed. See Occidental...