Bituminous Ins. Companies v. PA. MFRS'ASS'N INS. CO.

• Decision Date: 27 December 1976
• Docket Number: Civ. A. No. 74-2457.
• Citation: 427 F. Supp. 539
• Parties: BITUMINOUS INSURANCE COMPANIES v. PENNSYLVANIA MANUFACTURERS' ASSOCIATION INSURANCE COMPANY.
• Court: U.S. District Court — Eastern District of Pennsylvania

427 F. Supp. 539

BITUMINOUS INSURANCE COMPANIES v. PENNSYLVANIA MANUFACTURERS' ASSOCIATION INSURANCE COMPANY.

Civ. A. No. 74-2457.

United States District Court, E. D. Pennsylvania.

December 27, 1976.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Roger J. Harrington, Philadelphia, Pa., for plaintiff.

Jan E. DuBois, Philadelphia, Pa., for defendant.

OPINION

LUONGO, District Judge.

Plaintiff, Bituminous Insurance Companies (BIC), insures Leonard Shaffer Associates, Inc. (Shaffer), a general contractor. Defendant, Pennsylvania Manufacturers' Association Insurance Company (PMA), insures Lessner and Co., a subcontractor hired by Shaffer to do the air conditioning, plumbing, heating and ventilating work on a certain building. In the contract between them, Lessner agreed to indemnify Shaffer, and to defend Shaffer against all claims arising out of the execution of the work covered by their contract. Extensive water damage occurred during the construction work, and suits were instituted by the building owner and the tenant against Shaffer and Lessner in the Philadelphia Court of Common Pleas. Thereafter BIC filed this action seeking a declaratory judgment that PMA is obligated to furnish a defense to Shaffer and to pay all judgments against Shaffer arising out of the Common Pleas suits. BIC also seeks reimbursement for expenses incurred in investigating and defending those suits.

This matter was tried before me on March 15, 1976. PMA's Trial Memorandum raised a significant issue which had to be decided before I could reach the merits of the case. PMA contended that Shaffer is an indispensable party to this declaratory judgment suit, and unless it is joined, this court lacks power to hear the case under the Declaratory Judgment Act, 28 U.S.C. § 2201. BIC has made no effort to join Shaffer, apparently because its presence would destroy diversity between the parties,¹ leaving no basis for this court's jurisdiction.² I invited the parties to submit supplemental memoranda on the question whether the case could be adjudicated in the absence of Shaffer as a party. Memoranda were submitted and oral argument has been heard. This jurisdictional question will be considered first. I will discuss PMA's contention regarding the need to have Shaffer as a party under the Declaratory Judgment Act, 28 U.S.C. § 2201, and I will also discuss the issue under what I consider its proper analysis under Fed.R. Civ.P. 19.

"Indispensability" of Shaffer as a party.

Rule 19 sets forth the standards by which the court is to determine when a person should be joined as a party to a suit where joinder is possible, and when the suit must be dismissed if joinder is not possible. In the latter situation the person is then "regarded as indispensable." PMA asserts that Shaffer is "indispensable" but not on the basis of Rule 19. PMA contends, instead, that in the absence of Shaffer, the "actual controversy" which is required by the express language of the declaratory judgment statute, 28 U.S.C. § 2201, is lacking between BIC and PMA.

PMA's position depends on a line of cases holding that in a suit between insurers to determine which is obligated to provide coverage or to defend on behalf of an insured, the insured must be made a party. That rule was applied by the late Judge Goodrich in Nationwide Mutual Insurance Co. v. Fidelity & Casualty Co., 286 F.2d 91 (3d Cir. 1961), wherein he stated:

"Federal courts are not authorized to give advisory opinions and if we told the insurance companies their respective rights and duties against each other we certainly would be giving an advisory opinion. Each of the insurance companies has issued an insurance policy. It is called upon under the terms of that policy to defend its insured if action is brought against him. Such actions have been brought. It is impossible for us to say in this action where the insured are not parties that any company is relieved of its duty to defend."

Id. at 92-93 (emphasis added, footnotes omitted).

Nationwide Mutual relied on American Fidelity & Casualty Co. v. Pennsylvania Threshermen & Farmers' Mutual Casualty Insurance Co., 280 F.2d 453 (5th Cir. 1960). In that case the Court of Appeals for the Fifth Circuit held that the insurer had no right to deny its duty to defend its insured where the claims asserted against the insured were clearly within the coverage of the policy. "That investigation or defense of these suits . . . may fortuitously uncover a potential third party defendant or the existence of some party . . . who has, by some contract to which they are not a party, undertaken to provide protection to another, does not alter or modify in any way the nature of the claim or the obligation to defend it." Id. at 459. See also Diamond Shamrock Corp. v. Lumbermens Mutual Casualty Co., 416 F.2d 707 (7th Cir. 1969); Travelers Indemnity Co. v. Standard Accident Insurance Co., 329 F.2d 329 (7th Cir. 1964); Allstate Insurance Co. v. Federated Mutual Implement and Hardware Insurance Co., 254 F.Supp. 629 (D.S.C. 1966).

These cases furnished support for PMA's position that Shaffer is an "indispensable" party to this suit between BIC and PMA, but these precedents have been severely undermined by the Supreme Court's decision in Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 88 S.Ct. 733, 19 L.Ed.2d 936 (1968).

Provident Tradesmens was a declaratory judgment suit instituted by Provident Tradesmens as administrator of the estate of John R. Lynch, who died in an automobile accident. Lynch was a passenger in a car driven by Donald Cionci, which Cionci had borrowed from one Edward S. Dutcher. The suit³ was brought against Lumbermens Mutual Casualty Company, Dutcher's insurer, and Cionci's estate, seeking a declaration that the coverage of Dutcher's insurance extended to Cionci. Provident Tradesmens had earlier obtained a default judgment in the amount of $50,000 against Cionci's estate when Lumbermens refused to defend on the ground that Cionci's use of the automobile exceeded the permission granted by Dutcher, and, therefore, Dutcher's policy did not provide coverage to Cionci. Unable to obtain satisfaction of the judgment from Cionci's estate, Provident Tradesmens sought a declaration that Lumbermens was liable as Dutcher's insurer.

At the close of the trial of the declaratory judgment action, the trial judge directed a verdict in favor of Provident Tradesmens on the ground that Pennsylvania's Dead Man's Act prevented the defendants from offering any evidence to rebut the presumption of permission. The judgment entered in the case declared that "Donald Cionci was driving the motor vehicle owned by Edward S. Dutcher and insured by the Lumbermens Mutual Casualty Company under its policy . . . with the permission of Edward S. Dutcher . . .." and that Cionci "was an insured as defined in the policy." The Court of Appeals for the Third Circuit, after reargument en banc, reversed on two grounds which had not been raised in the trial court. One of the grounds was that "there was a failure to join an indispensable party to this action, Dutcher, the named insured in Lumbermens' policy."⁴Provident Tradesmens Bank and Trust Co. v. Lumbermens Mutual Casualty Co., 365 F.2d 802, 804-05 (3d Cir. 1966), rev'd sub nom., Provident Tradesmens Bank and Trust Co. v. Patterson, 390 U.S. 102, 88 S.Ct. 733, 19 L.Ed.2d 936 (1968).

The Court of Appeals reasoned that because of the finite limits of Dutcher's policy, he had an interest adverse to the interests of Lynch's estate and Smith's estate, and the determination of the rights of the two estates to coverage would necessarily affect Dutcher's rights in the policy. The Court then stated:

"It has been settled for more than a century and a half that a party is indispensable when his rights may be affected and that a court `cannot proceed to a final decision of the cause' until he is made a party.

The indispensable party doctrine is not procedural. It declares substantive law and accords a substantive right to a person to be joined as a party to an action when his interests or rights may be affected by its outcome. The indispensable party doctrine is beyond the reach of, and not affected by, Rule 19 of the Federal Rules of Civil Procedure, since the Rules, as later developed, cannot `abridge, enlarge or modify any substantive right.' 28 U.S.C.A. § 2072 (emphasis supplied)." Id. at 805 (citations omitted).

The Supreme Court reversed. It noted that the question of whether Dutcher was an indispensable party was "one to which the newly amended Rule 19(b) appears to address itself. . . ."⁵ 390 U.S. at 108-09, 88 S.Ct. at 737. Justice Harlan examined the result which would be reached by applying the tests of Rule 19. He concluded that Rule 19 made adequate provision for consideration as to how substantive rights might be affected, and that it was "a valid statement of the criteria for determining whether to proceed or dismiss in the forced absence of an interested person." Id. at 125, 88 S.Ct. at 746. In other words, the determination of whether a case could proceed in the absence of a party was to be governed by the tests of Rule 19, even though substantive rights of the absent party would be affected.

The effect of Provident Tradesmens is to make Rule 19 the test for determining whether a court may proceed with a case in the absence of a person whose interests may be affected by the outcome. Nationwide Mutual Insurance Co. v. Fidelity & Casualty Co., supra, and the other cases on which PMA relies are, therefore, no longer viable precedent.⁶ Since Provident Tredesmens was itself a declaratory judgment action, there can be no doubt that Rule 19 is also the test for determining the indispensability of parties to a declaratory judgment suit. The lower federal courts have followed the guide of the Supreme Court. See State Farm Mutual Automobile Insurance Co. v. Mid-Continent Casualty Co., 518 F.2d 292, 294 (10th Cir. 1975); ...