City Stores Co. v. Lerner Shops of District of Columbia, Inc.

• Decision Date: 06 March 1969
• Docket Number: No. 21642.,21642.
• Citation: 410 F.2d 1010
• Parties: CITY STORES COMPANY, Appellant, v. LERNER SHOPS OF DISTRICT OF COLUMBIA, INC., et al., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

410 F.2d 1010 (1969)

CITY STORES COMPANY, Appellant, v. LERNER SHOPS OF DISTRICT OF COLUMBIA, INC., et al., Appellees.

No. 21642.

United States Court of Appeals District of Columbia Circuit.

Argued October 23, 1968.

Decided March 6, 1969.

Mr. Robert C. Maynard, Washington, D. C., with whom Mr. Francis L. Casey, Jr., Washington, D. C., was on the brief, for appellant.

Mr. Jack Rephan, Washington, D. C., with whom Mr. Marshall E. Miller, Washington, D. C., was on the brief, for appellees.

Before BAZELON, Chief Judge, WILBUR K. MILLER, Senior Circuit Judge, and BURGER, Circuit Judge.

WILBUR K. MILLER, Senior Circuit Judge:

The appellees, Lerner Shops of District of Columbia, Inc., Feil Brothers Corporation and Mary Jane Stores of Washington, Inc., sued the appellant, City Stores Company, for losses sustained by them in a fire which they alleged was caused by the negligence of appellant in permitting combustible materials to accumulate in an alley between their places of business and that of City Stores.

Through interrogatories, the appellant learned that the appellees were insured against fire loss; that Feil Brothers Corporation had received from its insurance carrier a sum equal to the losses claimed by it, and that the other two appellees had received from their insurance carriers sums equal to more than 50 per cent of the losses claimed by them. The appellees said in their answers to the interrogatories that they "executed loan receipts¹ in connection with payments made to them as a result of their losses," and that "the loan receipts were executed in lieu of any subrogation agreements."

The appellees erred in saying they executed the loan agreements "in lieu of subrogation agreements;" for when an insurer pays a loss, it is by operation of law subrogated to the insured's right of action against a third party. This is called legal or equitable subrogation, and does not arise from nor depend upon contract; so in no event would it have been necessary for the appellees to execute a subrogation agreement. In Pearlman v. Reliance Ins. Co., 371 U.S. 132, 136, 83 S.Ct. 232, 235, 9 L.Ed.2d 190 (1962), the Supreme Court said in footnote 12:

"`The right of subrogation is not founded on contract. It is a creature of equity; is enforced solely for the purpose of accomplishing the ends of substantial justice; and is independent of any contractual relations between the parties.\' Memphis & L. R. R. Co. v. Dow, 120 U.S. 287, 301-302 7 S.Ct. 482, 488-489, 30 L.Ed. 595 (1887)."

It follows that the appellees here did not execute the loan agreements "in lieu of subrogation agreements;" rather obviously they did so for the purpose of avoiding the equitable subrogation which arises from payment by the insurer.

Conceiving that, despite the loan receipts, the payments made by the insurance companies were not loans, but in reality were in settlement of claims under the policies and that, therefore, the insurers were by operation of law subrogated to the rights of the appellees and were pro tanto the real parties in interest, the appellant moved that the court require the joinder of the insurance companies as parties plaintiff. This was in accord with the following statement in United States v. Aetna Surety Co., 338 U.S. 366, 380-381, 70 S.Ct. 207, 215, 94 L.Ed. 171 (1949):

"* * * Rule 17(a) of the Federal Rules of Civil Procedure * * * provides that `Every action shall be prosecuted in the name of the real party in interest,\' and of course an insurer-subrogee, who has substantive equitable rights, qualifies as such. If the subrogee has paid an entire loss suffered by the insured, it is the only real party in interest and must sue in its own name. 3 Moore, Federal Practice (2d ed.) p. 1339. If it has paid only part of the loss, both the insured and insurer (and other insurers, if any, who have also paid portions of the loss) have substantive rights against the tortfeasor which qualify them as real parties in interest."

The appellees, whose activities in this litigation are exclusively directed, controlled and financed by their insurance companies, opposed the motion. They argued that the loan receipts evidenced actual loans and not payments in settlement of claims; that, therefore, the insurance companies were not subrogated to the rights of the insured stores and were not the real parties in interest.

With respect to this motion the District Court entered the following order:

"This matter having come on for hearing on motion of the defendant to join certain insurance companies as real parties in interest, and it appearing to the Court that the issue involved herein is a controlling issue of law for which there is no precedent in this jurisdiction, and it further appearing that the authorities in other Federal courts are in such conflict that there is a substantial ground for difference of opinion on this issue, and it further appearing that erroneous decision on this motion would ultimately necessitate a new trial with proper parties before the court, and that therefore an immediate appeal from the order would materially advance the ultimate termination of this litigation, it is by the Court this 8th day of November, 1967

"ORDERED that defendant\'s motion be and the same is hereby denied, without prejudice to the defendant to seek an immediate appeal to the United States Court of Appeals for the District of Columbia Circuit within ten days of this order, pursuant to the provisions of 28 U.S.C. § 1292(b)."

We granted the application of City Stores for permission to appeal from this interlocutory order and, in consequence, this appeal was taken by it.

Whether the insurers are the real parties in interest who are required by Rule 17(a) to sue in their own names depends on whether the sums paid by the insurance companies were really settlements of claims under the policies, or were bona fide loans as the loan receipts purported to show. If the former, the loan receipts were merely subterfuges used to conceal the fact of actual settlement and so to avoid the effect of subrogation and the consequent impact of Rule 17(a); if the latter, the insurance companies could have the exclusive direction and control of the suit filed in the names of the appellees, without appearing therein as plaintiffs or otherwise.

In their arguments to the District Court, the appellees relied principally upon Luckenbach v. W. J. McCahan Sugar Refining Co., 248 U.S. 139, 39 S. Ct. 53, 63 L.Ed. 170 (1918), which they said unqualifiedly holds that an insured who has executed a loan receipt to an insurance company is, nevertheless, the real party in interest in a suit against a third party.

In the Luckenbach situation, the insurer's liability was not absolute; it was contingent only, and the resolution of the contingency might have required lengthy litigation. In those circumstances, the insurer lent to the insured the amount of its claim, payable only from proceeds which might be recovered from another whose liability, if any, preceded that of the lending insurer. In other words, in that case there was a valid reason for the use of the loan receipt; and it was the prompt payment to the insured, made possible by the lending arrangement, which caused Mr. Justice Brandeis to compliment the insurance industry on its altruism. Here the insurer's liability was not contingent, and the only reason apparent to us for the use of the loan receipts was to avoid the effect of subrogation; in fact, the appellees offer no other explanation, and in effect admit that such was the motive of the insurers.²

In most cases in which insurance companies use the loan agreement method in settling claims, their purpose is to avoid appearing openly in litigation for fear of prejudice in the minds of the jury. In Watsontown Brick Co. v. Hercules Powder Co., 201 F.Supp. 343 (M.D. Pa.1962), a case cited by the appellees, the court approved the following quotation from 157 A.L.R. 1268:

"Insurers, being reluctant to appear in lawsuits as formal parties because juries are supposed to be prejudiced against insurers, and bearing in mind the fact that if they can prevent subrogation they can avoid appearing in an action, have quite generally adopted the policy of settling policy claims by making a loan. In fact this seems to be the primary motive for making such a settlement in the vast majority of the cases. * * *"

Thus the insurers in this case have an unworthy motive, if not an improper and illegal purpose, in attempting to avoid subrogation by frustrating the enforcement of Rule 17(a).³

The appellees realize the limited scope of the Luckenbach ruling, for in their brief to us they admit the liability of the insurance company in that case was contingent. In argument here they abandon the reliance upon the Luckenbach case, which they vigorously asserted in the District Court, and instead say, "This Court should consider primarily the decisions of other federal courts which have decided this issue under circumstances similar to those now before this Court."

In support of their theory that the holding of the Luckenbach decision, limited as it was to a situation where the insurer was only contingently liable, has been expanded by subsequent federal decisions to cover a situation in which the liability of the insurer was absolute, the appellees cite several cases from district courts and courts of appeals in other circuits. Thus, the appellees say in effect that federal cases since the Luckenbach opinion have enlarged its holding by unqualifiedly approving the insurer's use of the loan receipt to avoid the necessity of suing in its own name.

We might be impressed by that assertion if in the subsequent federal decisions the courts had reached their conclusions through sound and independent reasoning. But, almost without exception, the district and circuit court cases cited by the appellees upholding the use of the loan receipt where the liability of the insurer is absolute...