Opinion
Case No. 99-15809-SSM Chapter 11, Adversary Proceeding No. 00-1032.
Date: May 4, 2000.
Kevin M. O'Donnell, Esquire, Henry O'Donnell, P.C., Fairfax, VA, Counsel for the plaintiff.
John M. Claytor, Esquire Harman, Claytor, Corrigan Wellman Richmond, VA, Counsel for the defendant Cincinnati Insurance Co.
Robert W. Hesselbacher, Jr., Semmes, Bowen Semmes, Baltimore, MD, Counsel for the defendant Mitchell, Horn Associates, Inc.
Mark Friedlander, Jr. Friedlander Friedlander, PC, VA, Counsel for Girard and Lynn Miller.
MEMORANDUM OPINION
This matter is before the court on the motion of defendant Cincinnati Insurance Company ("Cincinnati") to join necessary parties. A hearing was held on April 4, 2000, at which time the plaintiff, Sonoma Development, Inc. ("the debtor"), and Cincinnati were each present by counsel. At the conclusion of the hearing, the court took the matter under advisement to review the applicable law.
For the reasons stated, the motion will be denied.
Background
A voluntary chapter 11 petition under the Bankruptcy Code was filed on November 24, 1999, by the debtor, which remains in control of its property and business as a debtor in possession. A plan of reorganization has not yet been proposed or confirmed. The debtor's primary asset consists of real property located at 611 S. Royal Street in Alexandria, Virginia, valued (according to the schedules) at $725,000.
A brief discussion of the events leading up to the filing of the present adversary proceeding is appropriate to place the present motion in context. The debtor, which was engaged in the business of developing residential property for resale, constructed a single-family home at 611 S. Royal Street. As reflected on the debtor's schedule of executory contracts, Mr. and Mrs. Kurt Beyreis entered into a contract with the debtor to purchase the property, but the contract has not yet gone to closing. The reason for this is that the adjoining property owners, Girard and Lynn Miller ("the Millers"), brought a chancery suit against the debtor in the Circuit Court of the City of Alexandria. The debtor's construction project had resulted in an encroachment upon a recorded easement benefitting the Millers' property. That easement extended three feet from the north wall of the Millers' residence. The Millers obtained a permanent injunction that required the debtor to remove the entire south wall of the building the debtor had constructed. After losing on appeal, the debtor was unable to come up with the funds to demolish and reconstruct the encroaching wall. The debtor filed for chapter 11 relief once the Millers began prosecuting contempt proceedings for failure to comply with the injunction.
See Sonoma Dev., Inc. v. Miller, 258 Va. 163, 515 S.E.2d 577 (1999) for a more-detailed discussion of the Millers' state court action. The Millers also obtained a money judgment for trespass. That money judgment has been paid by Cincinnati and is not an issue in this adversary proceeding
The Millers filed a motion for relief from the automatic stay to permit them to pursue the enforcement of the injunction in state court. A preliminary hearing was held on February 9, 2000, at which time testimony was given. The court declined to terminate the automatic stay at that time primarily on the ground that the Millers had failed to demonstrate any immediate or concrete harm if the stay were to remain in effect while the debtor prosecuted adversary proceedings against Cincinnati and a surveyor to recover the costs (estimated at $247,000) of complying with the injunction.
On February 15, 2000, the debtor commenced the present adversary proceeding against Cincinnati and Mitchell, Horn Associates, Inc. ("MHA"), the general contractor for the construction project. Recovery is sought against MHA on the ground of negligence. Declaratory relief is sought against Cincinnati (which issued general liability insurance policies both for the debtor and for MHA) determining that the costs to comply with the injunction are a covered policy risk. Additionally, monetary damages are sought against Cincinnati for breach of contract and for its alleged bad faith refusal to pay the debtor's claim. In its answer to the complaint, Cincinnati has denied the substantive allegations. Cincinnati filed the present motion to add the Millers as necessary parties to the debtor's coverage claims. The absence of the Milers, according to Cincinnati, prevents the court from granting complete relief among the parties, and subjects Cincinnati to the risk of inconsistent obligations.
MHA is an affiliate of the debtor.
Cincinnati's motion is not clear as to whether it seeks joinder of the Millers with respect to all three counts as to which Cincinnati is a defendant. However, because Cincinnati is concerned with inconsistent interpretations of the insurance policy, the court's discussion would be limited to Count III. To the extent joinder is sought under all three counts, the court believes that the outcome of this matter would not be any different.
Discussion
Rule 19, Federal Rules of Civil Procedure, as incorporated by Federal Rule of Bankruptcy Procedure 7019, reads in pertinent part:
(a) Persons to be Joined if Feasible. A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction . . . shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may . . . (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.
Without question joinder of the Millers is feasible if the court determines that they are necessary parties. Therefore, Rule 19(b) is not implicated in this matter.
Cincinnati takes the position that any relief with respect to the coverage aspect of this case would be incomplete on the ground that the Millers would not be bound by any judgment entered in this action. As a result, it is argued, Cincinnati would be exposed to the possibility of inconsistent rulings if the Millers were file a future action against it.
Regardless of whether the debtor succeeds in this action, the court concludes that Cincinnati reads the language of Rule 19(a)(1) too broadly. It is true that Cincinnati's contention has been accepted by a line of cases that emphasizes the public interest in avoiding multiple lawsuits arising from the same set of facts. See, e.g., Angst v. Royal Maccabees Life Ins. Co, 77 F.3d 701,705 (3d Cir. 1996); Arkwright-Boston Mfrs. Mut. Ins. Co. v. City of New York, 762 F.2d 205, 209 (2d Cir. 1985);
4 Moore's Federal Practice, § 19.03 at 19-39,19-40 (Matthew Bender 3d ed.). However, the majority view is that an absent party is required to be joined only if, in his or her absence, the parties already named could not obtain complete relief between themselves. 4 Moore's Federal Practice, § 19.03 at 19-40. The Fourth Circuit follows the majority rule, taking the view that the language of Rule 19 is unambiguous and clear in that the mere prospect of future litigation by absent parties is of no import. See United States v. County of Arlington, 669 F.2d 925, 929 (4th Cir. 1982).
Thus, the court is left to determine whether this action could proceed without the joinder of the Millers. Cincinnati has not pointed to case law, nor has the court's research discovered any, that stands for the proposition that a victim must be joined in a lawsuit between the insured and the insurer disputing insurance coverage before the court may enter a declaratory judgment. If Cincinnati were the plaintiff, nothing would prevent it from adding the Millers as parties in order to avoid future litigation. However, the court finds no support for the conclusion that Virginia law mandates the joinder of the Millers.
Relying on Rule 19(a)(2)(ii), however, Cincinnati argues that the Millers have an interest in the subject matter of this adversary proceeding, and that their absence subjects Cincinnati to the risk of inconsistent interpretations of its policies. A prerequisite for joining a party under Rule 19(a)(2)(ii) is a showing that the absent party has an "interest" in the issues addressed in the action. Although undefined by the rules, courts have construed the term "interest" in the context of a necessary-party analysis to mean a "legally protected interest." See, e.g., Citizen Band Potawatomi Indian Tribe of Okla. v. Collier, 17 F.3d 1292 (10th Cir. 1994); 4 Moore's Federal Practice, § 19.03 at 19-47 ("This interest must be legally protected, not merely a financial interest or interest of convenience."); cf. Donaldson v. United States, 400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971) (under Rule 24(a)(2), the term interest involves a "significantly protectable interest"). An interest in a related matter is not sufficient. The absent party must have a direct stake in the subject matter of the litigation. 4 Moore's Federal Practice, § 19.03 at 19-47, 19-48.
On its face, the Millers arguably have an interest, within the meaning of Rule 19, in the present litigation based on their status as third-party beneficiaries to the insurance contract. However, that interest is significantly limited by Va. Code Ann. § 38.2-2200, which provides in relevant part as follows:
No policy or contract insuring or indemnifying against liability . . . for injury to or destruction of property, shall be issued . . . unless it contains in substance the following provisions or other provisions that are at least equally favorable to the insured and to judgment creditors:
* * *
2. That if execution on a judgment against the insured or his personal representative is returned unsatisfied in an action brought to recover damages for injury sustained or for loss or damage incurred during the life of the policy or contract, then an action may be maintained against the insurer under the terms of the policy or contract for the amount of the judgment not exceeding the amount of the applicable limit of coverage under the policy or contract.
Virginia thus allows an injured party to bring a direct action against the tortfeasor's insurance company to recover damages. However, the victim must first obtain a money judgment and then attempt to collect on it against the insured. As noted, the Millers did obtain a money judgment (for trespass), but that judgment has been satisfied by Cincinnati. What remains is an injunction, which does not involve the recovery of funds. Looking to the plain language of the statute, it would seem that the Millers are precluded from maintaining a direct action against Cincinnati without first holding an unsatisfied judgment. That said, there appears to be no present basis for joinder of the Millers since at this point they would have no right of action against Cincinnati.
One possible way the requirements of Va. Code Ann. § 38.2-2200(2) might be met would be if the Millers paid for the costs of enforcing the injunction and sought civil contempt sanctions against the debtor equal to the costs incurred. See Rainey v. City of Norfolk, 14 Va. App. 968, 421 S.E.2d 210 (1992) (obtaining a personal judgment against the party for the necessary costs incurred by the movant for bringing the injunction into compliance).
Nevertheless, the holding in Vermont Mut. Ins. Co. v. Everette, 875 F. Supp. 1181 (E.D.Va. 1995), suggests that the Millers may have a "legally protectable interest" with respect to the claim for declaratory relief. There, a homeowner's insurance company brought a declaratory judgment action against the insured and the victim of a sexual assault that took place in the insured's residence. Worth noting is the fact that the victim had not yet obtained a judgment against the insured party. After a default judgment was entered against the insured, the victim and the insurance company both moved for summary judgment. Of importance is the court's discussion on whether a "case or controversy" existed between the parties. In holding that there was, the court looked both to a Supreme Court decision applying Ohio's version of the "direct action" statute, see Maryland Cas. Co. v. Pacific Coal Oil Co., 312 U.S. 270, 61 S.Ct. 510, 85 L.Ed. 826 (1941), as well as to the language of Va. Code Ann. § 38.2-2200. The court concluded that the statute provides victims with a direct interest in insurance contracts, independent of the insured's rights. Id. at 1183-86; see also Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d 371, 375 n. 3 (4th Cir. 1994) (dicta). Accordingly, because a "case or controversy" could exist between an insurance company and a third-party victim who has not yet obtained a judgment against the insured, it is at least arguable that the Millers have the requisite "interest" required by Rule 19. Assuming that they do, the question then becomes whether Cincinnati has demonstrated that it would be subject to a substantial risk of inconsistent obligations.
The debtor contends that there is no risk of an inconsistent ruling because the Millers (who have not sought joinder) would be collaterally estopped from relitigating the outcome of this adversary proceeding. Under the doctrine of collateral estoppel in Virginia, "the parties to the first action and their privies are precluded from litigating (in a subsequent suit) any issue of fact actually litigated and essential to a valid and final personal judgment in the first action." Bates v. Devers, 214 Va. 667, 671, 202 S.E.2d 917, 921 (1974) (footnote omitted). The only requirement of collateral estoppel in dispute is privity, which involves a party holding an interest so identical to another that he or she represents the same legal right. Nero v. Ferris, 222 Va. 807, 813, 284 S.E.2d 828, 831 (1981). Virginia law requires that the court engage in a careful examination of the circumstances of each case to assess who are privies. Angstadt v. Atlantic Mut. Ins. Co., 249 Va. 444, 447, 457 S.E.2d 86, 87 (1995).
At a status hearing on the motion for relief from the automatic stay, counsel for the Millers advised the court that his clients did not wish to be made parties to this action.
The debtor's argument, stripped to its essentials, is that the Millers' rights are derivative of its own rights under the insurance policy. In the context of insurance law, it is argued, third-party claimants stand in the same shoes as the insured, see Morrel v. Nationwide Mut. Fire Ins. Co., 188 F.3d 218, 226 (4th Cir. 1999), and are subject to the same defenses that could be asserted against the insured by the insurance company.
Nevertheless, the then-Supreme Court of Appeals of Virginia has squarely addressed this issue, holding that third-party victims are not bound by judgments entered in prior actions between insured parties and insurance companies over coverage disputes. See Storm v. Nationwide Mut. Ins. Co, 199 Va. 130, 97 S.E.2d 759 (1957). As explained by the Court, the right of victims to seek repayment from insurance companies arises by statute at the time the accident occurs, independent of any judgment obtained in a lawsuit between insurance companies and the insured. Id. at 137, 97 S.E.2d at 764. Although Storm was decided under the prior version of Va. Code Ann. § 38.2-2200(2), the court sees no reason why the Supreme Court of Virginia would rule differently today.
Since collateral estoppel would not prevent the Millers from pursuing a separate lawsuit if Cincinnati were to succeed on the coverage issue in this adversary proceeding, Cincinnati is required to show that the risk of inconsistent obligations would be "substantial" if the Millers are not joined in this action. The court agrees that at least some possibility exists that the Millers might institute a separate lawsuit against Cincinnati, and that such a suit might subject Cincinnati to conflicting outcomes. A different outcome, however, does not necessarily equate to "double, multiple, or otherwise inconsistent obligations" as required by Rule 19. If Cincinnati prevails in this action, that simply means it will not have to write a check. Assuming that a subsequent lawsuit were to be successfully maintained by the Millers, Cincinnati might have to write a check. But there is no risk that it will have to write two checks (or the same check to two different claimants). Thus, it will not have incurred conflicting obligations. Additionally, the risk required by Rule 19 must be more than a theoretical "possibility" in the eyes of the court. "The inquiry contemplated by Rule 19 is a practical one." Coastal Modular Corp. v. Laminators, Inc., 635 F.2d 1102, 1108 (4th Cir. 1980). The court must consider all relevant factors, including the policies of judicial economy and fairness to the absentee party. 4 Moore's Federal Practice, § 19.03 at 19-58.
Here, not only is there no risk of a conflicting obligation, but the likelihood that Cincinnati will even have to defend a claim by the Millers arising out of the same set of facts is remote. There is at the present time no unsatisfied money judgment. Whether there will ever be a further money judgment against the debtor that might provide a basis for a direct action against Cincinnati is at least doubtful. Even if there is a future claim, the prejudice to Cincinnati from relitigating the coverage issue would not be severe. The coverage dispute simply involves the interpretation of a contract — an issue likely to be resolved on summary judgment — rather than complicated factual disputes that might be expensive and time-consuming to try. Accordingly, the court concludes that sufficient grounds have not been shown to make the Millers involuntary parties to this action.
A separate order will be entered denying the motion to join the Millers as parties.