Sears, Roebuck and Co. v. American Mut. Liab. Ins. Co.

• Decision Date: 10 February 1967
• Docket Number: No. 15792.,15792.
• Citation: 372 F.2d 435
• Parties: SEARS, ROEBUCK AND CO., Plaintiff-Appellant, v. AMERICAN MUTUAL LIABILITY INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

372 F.2d 435 (1967)

SEARS, ROEBUCK AND CO., Plaintiff-Appellant, v. AMERICAN MUTUAL LIABILITY INSURANCE COMPANY, Defendant-Appellee.

No. 15792.

United States Court of Appeals Seventh Circuit.

February 10, 1967.

Burton Y. Weitzenfeld, John F. McClure, William S. Hanley, Chicago, Ill., for plaintiff-appellant, Arnstein, Gluck, Weitzenfeld & Minow, formerly known as Kahn, Adsit, Arnstein, Gluck, Weitzenfeld & Minow, Chicago, Ill., of counsel.

Henry J. Marquard, Edward V. Scoby, Kralovec, Sweeney, Marquard & Scoby, Chicago, Ill., for defendant-appellee.

Before HASTINGS, Chief Judge, MAJOR, Senior Circuit Judge, and FAIRCHILD, Circuit Judge.

HASTINGS, Chief Judge.

This is an appeal from a dismissal by the district court, sua sponte, of a diversity declaratory judgment action, instituted by Sears, Roebuck and Co., a New York corporation having its principal place of business in Illinois, against American Mutual Liability Insurance Company, a Massachusetts corporation.

Sears sought a declaratory judgment that American Mutual was obligated, by reason of an insurance contract containing a vendor's endorsement, to defend and indemnify Sears in an action filed by one John Ervin in a circuit court of Illinois.

In his suit against Sears, Ervin alleged that thermal underwear, which he bought under warranties from Sears, burst into flames while he was welding, causing him severe injuries. In a second count, he alleged that Sears was negligent in failing to inspect the underwear properly, in failing to warn him of the flammability of the garment and in placing the garment on sale. Damages were sought in the amount of $500,000.

In its declaratory judgment complaint in the federal district court, Sears alleged that the underwear in question in the state court action was purchased from the Flagg-Utica Corporation. Flagg-Utica had a contract of insurance with American Mutual which, among other provisions, insured Flagg-Utica against loss from damages imposed by law for personal injuries alleged to have been suffered by any person on account of any occurrence caused by the existence, possession, consumption, or use of any product manufactured, sold, handled or distributed by Flagg-Utica. American Mutual was required to defend such suits.

The policy also contained a vendor's endorsement whereby coverage was extended to liability of a vendor of Flagg-Utica's products. Sears alleged that the vendor's endorsement applied to it and that American Mutual, which had refused a tender of defense in the Ervin suit, was obligated to defend Sears.

Sears requested the district court to find that in the Ervin suit American Mutual was obligated to defend Sears under the vendor's endorsement, to reimburse Sears for monies expended in defense and to pay any judgment rendered against Sears.

The district court dismissed the complaint on the ground that Sears might not be found liable in the state litigation, in which case the costs of defense of the suit would likely be less than $10,000, causing a failure of jurisdictional amount and rendering any prior federal declaration moot. The possibility of resolution, in the state litigation, of some of the issues in the declaratory judgment action and the possibility of needless duplication of evidence and expense were given by the trial court as additional grounds for the dismissal.

While the district court noted that a determination in the state court whether Flagg-Utica was the manufacturer of the garment would not be binding on Flagg-Utica since it was not a party to the litigation, the court stated that Sears could solve that problem by bringing Flagg-Utica and other suppliers into the state litigation as third party defendants. The fact that, were this done, American Mutual, as Flagg-Utica's insurer, would be opposing Sears in the state action was viewed with equanimity, for if Sears was covered in the policy American Mutual issued to Flagg-Utica, American Mutual would ultimately have to pay any judgment against Sears and costs of the action.

On appeal, Sears contends its declaratory judgment action involved the requisite jurisdictional amount. It further contends that the district court abused its discretion under the Declaratory Judgment Act in refusing to exercise jurisdiction because of the pendency of another suit in which, if third party proceedings were instituted, the possibility existed of resolving some of the matters presented in the declaratory judgment action.

Title 28, § 2201, U.S.C.A. reads:

"In a case of actual controversy within its jurisdiction, except with respect to Federal taxes, any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such."

Declaratory relief under this provision is discretionary. Brillhart v. Excess Ins. Co., 316 U.S. 491, 494, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942). However, the provision should be construed to effectuate the purpose of the Act to afford relief from uncertainty and insecurity with respect to legal relations. American Automobile Ins. Co. v. Freundt, 7 Cir., 103 F.2d 613, 619 (1939); Aetna Casualty & Surety Co. v. Quarles, 4 Cir., 92 F.2d 321, 324 (1937).

Declaratory judgment should not be granted to try particular issues without settling the entire controversy, or to interfere with an action already instituted. Quarles, supra, at 325. But the pendency of another suit is not a sufficient reason to decline declaratory jurisdiction if that suit will not necessarily determine the controversy between the parties. Yellow Cab Co. v. City of Chicago, 7 Cir., 186 F.2d 946, 951 (1951). The standards generally to be applied in exercising discretion to hear a declaratory judgment action are whether a declaratory judgment will settle the particular controversy and clarify the legal relations in issue. Samuel Goldwyn, Inc. v. United Artists Corporation, 3 Cir., 113 F.2d 703, 709 (1940).

Generally, an appellate court may set aside a trial court's exercise of discretion only if the exercise of such discretion could be said to be arbitrary. But the standard of review applicable to discretion exercised under the Declaratory Judgment Act is not so limited. Discretion must be exercised for a reason related to the purposes of the Act; it must relate to the clarification of legal issues and the settlement of controversies or to some overriding policy consideration such as abstention in state matters, inconvenience to parties, or improper use of the declaratory judgment action. Cf. Wright, Federal Courts, 391-92 and cases cited there.

Thus, if, in view of the purposes of the Act, the trial court is erroneous in its decision, but not arbitrary, an appellate court may substitute its own judgment for that of the trial court. Delno v. Market St. Ry. Co., 9 Cir., 124 F.2d 965, 967-968 (1942)¹.

With respect to the question of jurisdictional amount, it does not appear that the district court declined to hear this case because of a possible lack of jurisdiction. Rather, its discretion was exercised in part because of the possibility that the jurisdictional amount might not be forthcoming.

There is no doubt...