Merit Ins. Co. v. Leatherby Ins. Co.

• Decision Date: 26 July 1978
• Docket Number: No. 77-2220,77-2220
• Citation: 581 F.2d 137
• Parties: MERIT INSURANCE COMPANY, Plaintiff-Appellee, v. LEATHERBY INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 137

581 F.2d 137

MERIT INSURANCE COMPANY, Plaintiff-Appellee, v. LEATHERBY INSURANCE COMPANY, Defendant-Appellant.

No. 77-2220.

United States Court of Appeals, Seventh Circuit.

Argued April 6, 1978.

Decided July 26, 1978.

Donald E. Casey, Chicago, Ill., for defendant-appellant.

Steven G. M. Stein, Chicago, Ill., for plaintiff-appellee.

Before FAIRCHILD, Chief Judge, and SWYGERT, Circuit Judge, and JAMESON, Senior District Judge. ^*

JAMESON, Senior District Judge.

Appellee, Merit Insurance Company, brought this action against appellant, Leatherby Insurance Company, alleging three counts of conspiracy to defraud, rescission, and fraud with respect to a contract of reinsurance between Merit and Leatherby. ¹ On January 17, 1977, Leatherby, relying on a provision in the contract providing for arbitration of "any controversy or claim arising out of or relating to this contract", ² filed a motion to stay all proceedings and compel arbitration. The district court, on June 20, 1977, granted a three month stay and ordered arbitration. Arbitration proceedings commenced but were not completed during that period. The court, on Leatherby's motion, extended its stay an additional 45 days. On October 13, 1977, Merit filed a notice of dismissal of all counts of its complaint against Leatherby pursuant to Rule 41(a)(1), Fed.R.Civ.P. Leatherby then moved to vacate and quash the notice of dismissal. The district court denied the motion in an order dated October 19, 1977. We affirm.

Rule 41(a)(1)

Rule 41(a)(1) provides that a plaintiff may dismiss an action "without order of court (i) by filing a notice of dismissal at any time before service by the adverse party of an answer or of a motion for summary judgment, whichever first occurs, or (ii) by filing a stipulation of dismissal signed by all parties who have appeared in the action". The purpose of the rule is "to facilitate the voluntary dismissal of an action, but safeguard abuse by limiting its application to an early stage of the proceedings." 5 Moore's Federal Practice P 41.02(1) at 41- 18. The dismissal is without prejudice unless the plaintiff has already "once dismissed in any court of the United States or of any state an action based on or including the same claim," in which case the "notice of dismissal operates as an adjudication upon the merits . . . ." Rule 41(a)(1).

Leatherby does not contend that it served either an answer or a motion for summary judgment. Instead, it argues that despite the clear language of Rule 41(a)(1)(i) courts have construed the rule to bar plaintiff's right to dismiss by notice once "the issues have been joined" and the court has begun to address the merits of the case. Leatherby submits that when it moved to stay proceedings and obtain arbitration, the only substantive issue before the court was whether or not the contractual provision for arbitration applied to the controversy. Thus, Leatherby asserts, by its order staying proceedings and compelling arbitration, the district court effectively faced and adjudicated the "merits" to the fullest extent then possible. "In effect the court had conducted a trial on the only issue before it, 'arbitrability'."

Leatherby contends further that dismissal by notice should not be allowed where it would lead to prejudice. It argues that the drafters of the rule were concerned with limiting the plaintiff's right to prevent the waste of resources so that once the parties have committed substantial resources to preparation of their case voluntary dismissal would no longer be allowed. Leatherby claims that it has incurred substantial legal costs and expenses in litigation.

Leatherby seeks reinstatement in the district court for a hearing pursuant to Rule 41(a)(2) ³ to determine (1) whether costs and attorney fees should be awarded Leatherby, and (2) what effect the dismissal will have on the arbitration proceedings. Leatherby contends that dismissal may jeopardize the arbitration because the court's order is the prime force compelling arbitration.

The "Merits" of the Controversy

In arguing that the district court has addressed the "merits" of the case and dismissal by notice accordingly is precluded, Leatherby relies upon Harvey Aluminum, Inc. v. American Cyanamid Co., 203 F.2d 105 (2 Cir.), Cert. denied, 345 U.S. 964, 73 S.Ct. 949, 97 L.Ed. 1383 (1953). In Harvey, before the defendants had filed an answer, the court had conducted a four day hearing on a motion for an injunction Pendente lite. That hearing, which resulted in 420 pages of record, dealt substantially with the merits of the case, namely, whether the plaintiffs were entitled to specific performance of an agreement allegedly made with the defendants. The court denied the motion, finding, Inter alia, that the plaintiffs' chance of success on the merits were "remote, if not completely nil". The defendants, fearing that the plaintiffs were about to bring suit in another forum, then obtained an order staying the plaintiffs and directing them to show cause why they should not be enjoined from commencing legal proceedings in another jurisdiction. Before the show cause hearing was held, however, the plaintiffs filed a voluntary notice of dismissal. The district court denied defendants' motion to vacate this notice and defendants appealed.

The Second Circuit reversed, finding that the defendants had been forced to considerable effort and expense in preparation for the injunction hearing and at the hearing "the merits of the controversy were squarely raised and the district court in part based its denial of the injunction on its conclusion that the plaintiffs' chance of success on the merits was small." Id. at 107-08. The court concluded that "a literal application of Rule 41(a)1 to the present controversy would not be in accord with its essential purpose of preventing arbitrary dismissals after an advanced stage of a suit has been reached." Id. at 108.

Harvey has been considered, distinguished, and criticized in many subsequent cases. In Littman v. Bache & Co., 252 F.2d 479, 481 (2 Cir. 1958), the Second Circuit found that the defendant's motion to transfer the case to another forum had not raised the merits of the case and that the only issue before the district court was whether to grant defendant's motion to transfer. Hence the Harvey exception was not applicable. ⁴ Similarly, this court in Scam Instrument Corp. v. Control Data Corp., 458 F.2d 885, 890 (7 Cir. 1972), citing Littman, concluded that the motion filed by the defendant challenged only the venue of the court and "did not create any issue in fact as to the validity of the patents or whether they had been infringed" the subject matter of the complaint. The court set aside a "conditioned order of dismissal", holding that the cause had been dismissed voluntarily by plaintiff's notice under Rule 41(a)(1). ⁵

In Pilot Freight Carriers, Inc. v. International Brotherhood of Teamsters, 506 F.2d 914 (5 Cir.), Cert. denied, 422 U.S. 1048, 95 S.Ct. 2665, 45 L.Ed.2d 700 (1975), the plaintiff was dismissed by notice under Rule 41(a)(1) following arguments on and denial of a motion for injunctive relief. The court declined to follow Harvey, noting that the "exceptional equitable considerations which apparently motivated the Harvey decision" were not present and that if Harvey were to be "read more broadly as proscribing dismissal under F.R.C.P. 41(a)(1) whenever the merits of the controversy have been presented to the court in any manner, we must disagree with the decision and respectfully refuse to follow it". Id. at 916. The court said that such a rule would make Rule 41(a)(1) unavailable whenever a party moves for injunctive relief since that type of motion necessarily entails consideration of the merits, and that rule "would amount to no less than a flat amendment of Rule 41(a)(1) . . .. If such a comprehensive modification of the Rule is desirable, the request must be addressed to the Supreme Court and Congress, not to this Court." Id. at 916-17.

The provisions of Rule 41(a) and cases construing the rule were carefully analyzed in D. C. Electronics, Inc. v. Nartron Corp., 511 F.2d 294 (6 Cir. 1975), an antitrust action in which the plaintiff had obtained a temporary restraining order and applied for a preliminary injunction. It withdrew the application for a preliminary injunction and dismissed the action under Rule 41(a)(1). The court noted that Rule 41(a)(1)(i) initially limited plaintiff's absolute right of voluntary dismissal to the time before answer, was amended in 1948 to include a motion for summary judgment, and further amended three times since 1948. Yet, "it has not been broadened to include other motions or pleadings which would bar a dismissal by notice". Id. at 296. The court concluded that "the Harvey rationale is without validity where the merits of the controversy have not been raised" before answer or motion for summary judgment and would not be applicable. Id. at 297. The court found even more persuasive the argument that "Rule 41(a)(1)(i) is clear and unambiguous on its face and admits of no exceptions that call for the exercise of judicial discretion by any court". Id. at 298.

In Miller v. Reddin, 422 F.2d 1264 (9 Cir. 1970), cited by this court in Scam, the defendant had filed a motion to dismiss, followed by a hearing at which the district court announced orally that it was going to rule in favor of the defendant and directed that findings of fact, conclusions of law and an order be prepared. Before any judgment had been entered the plaintiff filed a voluntary notice of dismissal under Rule 41(a)(1). The court held ineffective an attempted nunc pro tunc dismissal entered by the trial court and held that the voluntary notice filed by the plaintiff had terminated the action. Id. at 1266.

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