Westchester Fire Ins. Co. v. Mendez

Decision Date28 October 2009
Docket NumberNo. 07-17383.,07-17383.
Citation585 F.3d 1183
PartiesWESTCHESTER FIRE INSURANCE COMPANY, Plaintiff-Appellee, Northwest Airlines, Inc., Intervenor-Appellant, v. Phil MENDEZ, doing business as Professional Aircraft Line Service, Defendant.
CourtU.S. Court of Appeals — Ninth Circuit

Gustafson & Cercos, Las Vegas, NV, for the plaintiff-appellee.

Appeal from the United States District Court for the District of Nevada, Philip M. Pro, District Judge, Presiding. D.C. No. CV-05-01417-PMP.

Before: DOROTHY W. NELSON, MARSHA S. BERZON and RICHARD R. CLIFTON, Circuit Judges.

CLIFTON, Circuit Judge:

Westchester Fire Insurance Company brought a declaratory relief action against Phil Mendez, its insured policyholder under a commercial general liability insurance policy. Westchester contended that it had no obligation to defend or indemnify Mendez against a certain claim because he failed to give proper notice to the insurance company of the claim. The injured party, Northwest Airlines, whose airplane was allegedly damaged by one of Mendez's employees, intervened in the action. The district court entered default against Mendez for repeatedly failing to appear for his deposition. Based on that default, the court entered a default judgment in favor of the insurance company, giving Westchester the declaration that it sought. Northwest appeals, contending that it should have been permitted to defend against the declaratory relief action on its own. We agree, vacate the default judgment, and remand for further proceedings.

I. Background

Defendant Phil Mendez owned and operated an aircraft maintenance business under the name Professional Aircraft Line Services ("PALS").1 Mendez provided maintenance services for aircraft at the McCarran International Airport in Las Vegas. Northwest Airlines was one of his customers, under a contract that required Mendez to purchase and maintain commercial general liability insurance.

Mendez was insured under an Airport Owners and Operators General Liability Policy issued by Westchester. As is commonly the case, the policy provided that Mendez was required to give prompt notice of any possible claim:

You must see to it that we are notified as soon as practicable of an "occurrence" or an offense which may result in a claim ... If a claim is made or "suit" is brought against any insured, you must (1) Immediately record the specifics of the claim or "suit" and the date received; and (2) Notify us as soon as practicable.... You and any other involved insured must: (1) Immediately send us copies of any demands, notices, summonses or legal papers received in connection with the claim or "suit" ....

This action arises out of an incident on February 6, 2002 in which an aircraft owned by Northwest sustained substantial damage when it rolled down an embankment at McCarran Airport. A Mendez employee was in the cockpit at the time of the incident. Mendez did not report the incident to Westchester.

A few months later, in July 2002, Northwest, through its counsel and its own insurer, sent a letter to Mendez, notifying him of Northwest's claim against Mendez and requesting that Mendez forward the correspondence to his insurer. Despite Northwest's request, Mendez did not notify Westchester.

More than a year later and more than twenty months after the plane was damaged in November 2003, Northwest directly notified Westchester of the episode and of Northwest's claim against Mendez. This was the first time Westchester had been informed of the incident.

Westchester's claims agent, Ace USA, tried several times to get in touch with Mendez, requesting that Mendez contact Westchester and reminding Mendez of his obligations as the insured under the policy. At one point, in February 2004, Mendez contacted Ace and indicated he would provide all documents in his possession relating to the claim. When it had not received the material by May 2004, Ace contacted Mendez by phone. He again agreed to provide all relevant documents, including material from the Federal Aviation Administration allegedly absolving Mendez of any liability. He did not follow through on that promise, however. Despite efforts by Ace to follow up, Mendez had no further contact with Ace and never provided the materials.

In November, 2004, Northwest's insurer notified Ace that Northwest had filed suit against Mendez in Minnesota and that Mendez was in default in that action. Shortly thereafter, Ace, on Westchester's behalf, issued a denial of coverage letter to Mendez based on Mendez's failure to cooperate and failure to notify Westchester or Ace of the lawsuit. The letter was hand delivered to and acknowledged by Mendez on November 29, 2004.

Northwest obtained a default judgment against Mendez in Minnesota state court in the amount of $10,608,673, on January 11, 2005. Almost ten months later, on November 5, 2005, apparently in reaction to a judgment debtor's examination scheduled by Northwest in pursuit of its default judgment, counsel for Mendez made a demand against Westchester for a defense. Westchester offered to provide Mendez with counsel to attempt to set aside the default judgment in favor of Northwest, subject to a reservation of rights, but Mendez did not respond to the offer.

A few days later, on December 1, 2005, Westchester filed this diversity action in federal district court in Nevada seeking a declaratory judgment that Mendez breached his duties under the policy, that Mendez had forfeited the right to make a claim under the policy, and that Westchester had no duty to defend or indemnify Mendez. Mendez filed an answer on December 30, 2005. Westchester filed an amended complaint on June 14, 2006. Mendez did not answer the amended complaint.

In the meantime, on March 3, 2006, Northwest moved to intervene in the action filed by Westchester. The district court granted Northwest's motion to intervene on March 27, 2006. As will be discussed below, Northwest did not file a pleading in its own behalf in the lawsuit in the form of either an answer to Westchester's complaint or of any affirmative claim of its own, despite the requirement for such a pleading in Rule 24(c) of the Federal Rules of Civil Procedure. It was permitted by the district court to intervene, nonetheless.

Westchester made repeated attempts to depose Mendez, but Mendez never attended the scheduled depositions. Sometime later, Mendez's attorneys filed a motion to withdraw as counsel due to inability to communicate with their client and failure to receive payment, which the district court granted on August 9, 2006.

Westchester then moved to strike the answer filed on behalf of Mendez or to compel Mendez's deposition. The court granted the motion to compel and denied the motion to strike, a magistrate judge holding that there was not at that point a clear record of delay and disobedient conduct warranting the entry of a default judgment and that additional effort should be made to secure Mendez's participation.

Westchester hired a private investigator to attempt to serve Mendez personally. The investigator confirmed Mendez's address and attempted to serve him at the address on multiple occasions. The investigator also left notes at Mendez's residence and with his three nearest neighbors. After the investigator was unable to serve Mendez personally, Westchester served Mendez with the Fourth Amended Notice of Deposition of Phil Mendez via certified mail, which was returned marked "unclaimed."

The deposition of Mendez did not occur. Westchester again moved to strike the answer filed on behalf of Mendez and, further, for entry of default judgment. The district court granted the motion to strike and entered a default judgment against Mendez under Rule 37(d) for the failure to respond to discovery, in an order entered November 5, 2007.

In the order, the district court held that Northwest, as a party to the suit, was bound by the default judgment entered against Mendez. The court's order explained that ruling:

The Court will not exempt Northwest from the effects of a default judgment against Mendez because no authority supports such an exemption. No duty to intervene exists, and a decision not to intervene does not expose a non-party to a proceeding's preclusive effects. Kourtis v. Cameron, 419 F.3d 989, 998 (9th Cir.2005). But, if a party chooses to intervene, a grant of intervention makes the intervenor a full party. Comm'rs Court of Medina County, Tex. v. United States, 683 F.2d 435, 440-41 (D.C.Cir. 1982). And, a party is bound by a judgment in litigation. Yniguez v. Arizona, 939 F.2d 727, 735 (9th Cir. 1991) (quoting Hansberry v. Lee, 311 U.S. 32, 40, 61 S.Ct. 115, 85 L.Ed. 22 (1940)). A judgment "among parties to a lawsuit resolves issues as among them...." Martin v. Wilks, 490 U.S. 755, 762, 109 S.Ct. 2180, 104 L.Ed.2d 835 (1989), superseded by statute on other grounds. Joinder as a party subjects parties to the Court's jurisdiction and binds them to a judgment. Westlake N. Prop. Owners Ass'n v. City of Thousand Oaks, 915 F.2d 1301, 1306 (9th Cir.1990) (citing Martin, 490 U.S. at 762, 109 S.Ct. 2180).

Northwest was not obligated to intervene. Now that it has, however, the judgment binds it as a party. Thus, this Court will not specifically exempt Northwest from the effects of a default judgment against Mendez.... A default judgment against Mendez may affect Northwest's ability to recover for the incident, but whether this judgment might preclude Northwest from bringing separate litigation against Westchester is a distinct issue not presently before the...

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