GREENWAY CENTER, INC. vs. ESSEX INSURANCE COMPANY, Appellant, ANNETTE MAIONE, Individually and as Administrator of the Estate of Mark Willet
No. 05-3782
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
January 30, 2007
On Appeal from the United States District Court For the Middle District of Pennsylvania (No. 04-CV-01143). District Judge: Honorable James M. Munley. Argued on November 27, 2006.
(Opinion Filed: January 30, 2007)
Richard D. Picini, Esq. (argued)
Jennifer L. Casatelli, Esq.
Picillo Caruso O‘Toole, P.C.
371 Franklin Avenue
Nutley, NJ 07110
Counsel for Appellant Essex Insurance Company
Ronald V. Santora, Esq. (argued)
Bresset & Santora, LLC
1188 Wyoming Avenue
Forty Fort, PA 18704
Counsel for Appellee Greenway Center, Inc.
Joseph P. Hanyon, Esq. (argued)
Michael B. Kaspszyk, Esq.
Merwine, Hanyon, Kaspszyk, LLP
HC 89, Box 105, Route 940
Pocono Summit, PA 18346
Counsel for Appellee Annette Maione
GARTH, Circuit Judge:
This appeal requires us to decide whether the district court properly held that it was foreclosed by the doctrine of issue preclusion from making an independent determination whether appellee Greenway Center, Inc. (“GCI“) is a successor in interest to Winco Acquisitions, Inc. (“Winco“) – a company which was insured by appellant Essex Insurance Company (“Essex“). The district court found that a state court had already decided the issue – i.e., that GCI is a successor in interest to Winco, and therefore held that Essex is obligated to defend and indemnify GCI in the state court action brought by appellee Annette Maione against GCI. Because we find that the requirements for the application of issue preclusion have not been met, we vacate the judgment in favor of GCI and remand to the district court for an independent determination, on the merits, of whether GCI is a successor in interest to Winco.
I.
In 1996, Winco, a Pennsylvania Corporation, began operating a substance abuse detoxification center named Greenway Center (“Greenway“) in Henryville, Pennsylvania.2
In March 1998, while Winco was still in bankruptcy, Greenway was reopened by an entity named Healthcare Management Associates, Inc. (“HMA“), which was authorized by the Bankruptcy Court to operate the facility as an agent for Winco. In September 1998, GCI, plaintiff-appellee in the present case, was incorporated in Pennsylvania by the owners of HMA. On October 16, 1998, HMA submitted to the Bankruptcy Court on behalf of Winco a Debtor‘s Plan of Reorganization and a Debtor‘s Disclosure Statement.3 On September 7, 1999, the
Beginning at least as early as February 3, 1997, Essex issued a general liability insurance policy covering certain liabilities arising from the operation of Greenway. The named insured on the policy was “Winco Acquisition, Inc. d/b/a Greenway Center.” The policy contained a non-assignability clause, which states: “Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.”
On June 23, 1999, appellee Annette Maione, Mark Willet‘s wife and the administratrix of his estate, filed a wrongful death action in the Court of Common Pleas of Monroe County (the “state court action“). Maione named as defendant in the action only GCI and not Winco. GCI was not a named insured on Essex‘s policy.
Essex initially engaged attorney Frank Baker to represent GCI in the state court action. However, at some point Essex came to the conclusion that GCI was not insured under its policy and, on December 28, 1999, Essex sent GCI a letter formally denying coverage in the state court action. On or about March 30, 2000, Baker formally withdrew from representing GCI.
Because GCI did not come into existence until a year after Willet‘s death and Winco‘s bankruptcy, that entity – GCI – could only be held liable for the death if it were found to be a successor in interest to Winco. Thus, by filing her action against GCI, Maione had named the wrong defendant.
On July 21, 2000, in an effort to remedy her error, Maione filed a second wrongful death action in the Court of Common Pleas of Monroe County – this action named Winco as defendant. Essex retained counsel to defend Winco, its named insured, in this second action. On December 31, 2001, this second action was dismissed on the grounds that Willett had died in 1997 and thus the two-year statute of limitations had
III.
On June 3, 2002, Maione filed a Motion to Correct Name of Defendant in the state court action. The motion sought an order “allowing [Maione] to amend the caption so as to name the defendant as ‘Winco Acquisition, Inc. d/b/a Greenway Center’ or ‘Greenway Center, Inc. as successor in interest to Winco Acquisition, Inc.‘” In support of this motion, Maione asserted that:
On the date that the subject writ of summons was served, both Greenway Center, Inc. and Winco Acquisition, Inc. d/b/a Greenway Center operated under the identical name, “Greenway Center“, operated the identical business at the identical mailing address and at the identical location where the death of plaintiff‘s decedent occurred.
. . . .
Allowing a correction of the name of the defendant will allow the court to secure a determination of this case based upon the merits rather than a mere technicality.
App. at 106-7.
Essex engaged Frank Baker (the same attorney it had retained to defend Winco in the second wrongful death action,
IV.
On October 9, 2002, the state court, per Judge Peter J. O‘Brien, Pennsylvania Court of Common Pleas, issued a decision and order granting Maione‘s motion to the extent of
In the “Findings of Fact” section of his opinion, Judge O‘Brien stated that the facility to which Willet was admitted was, “both prior to the admission of Plaintiff‘s decedent and through the current date . . . identified and operated as ‘Greenway Center.‘” He further found that, in the fall of 1998, Winco submitted a Debtor‘s Plan of Reorganization to the United States Bankruptcy Court for the Middle District of Pennsylvania. The opinion then quotes the following provision contained in the Plan, adding emphasis as below:
Class 5 – Equity Security Holders. An Equity Security Holder is a party which has equity or an investment interest in the Debtor. With respect to the herein Chapter 11 case, the Equity Security Holders are the shareholders. This class is impaired, and shall surrender ownership in the debtor corporation upon confirmation. THIS PLAN WILL NOT VIOLATE THE ABSOLUTE PRIORITY RULE BECAUSE THE SHAREHOLDERS ARE NOT RETAINING
THEIR STOCK AND ALL STOCK SHALL BE VESTED IN GREENWAY CENTER, INC. See 11 U.S.C. Section 1129(b) .
Judge O‘Brien also found that the attorney who had executed the Debtor‘s Plan of Reorganization on behalf of Winco had specifically represented to the Bankruptcy Court that all of the stock of Winco Acquisition, Inc. would be vested in Greenway Center, Inc.” Apparently based upon the foregoing, Judge O‘Brien concluded that “Greenway Center, Inc. was set up to assume the stock from Winco Acquisition, Inc. when the bankruptcy was closed, and to act as its successor in operating the facility in Henryville.”
The “Discussion” portion of Judge O‘Brien‘s decision consists, in pertinent part, of the following:
In the case at bar, it is apparent that Greenway Center, Inc. is the successor in interest to Winco Acquisition, Inc. by virtue of the Reorganization Plan confirmed by the Bankruptcy Court. It is further evident that the initial process was served on the appropriate representative of either or both corporate entities and there is no prejudice to any party in allowing this action to continue. As the Supreme Court observed in Paulish v. Bakaitis, supra:
Since from the record it is clear that the same Bertocci business enterprise was involved throughout,there is here no substitution of parties, but the correction of the designation under which the right party was originally sued.
Therefore, we will allow the requested relief.
It is significant that Judge O‘Brien‘s opinion contains no discussion of Pennsylvania “successor in interest” law. Indeed, the decision cites no legal authority whatsoever with respect to the liability of a successor corporation under Pennsylvania law. The decision does, however clearly hold that “Greenway Center, Inc. is the successor in interest to Winco Acquisition, Inc. by virtue of the Reorganization Plan confirmed by the Bankruptcy Court.”
V.
In 2003, GCI filed the present declaratory judgment action in the Monroe County Court of Common Pleas seeking a declaration that, because GCI is named in the state court action as a “successor to Winco Acquisition, Inc.,” Essex has an obligation to defend and indemnify it in Maione‘s state court wrongful death action. On May 26, 2004, Essex removed the action to the United States District Court for the Middle District of Pennsylvania. On April 19, 2005, a non-jury trial was held before Judge James M. Munley. Maione, as well as GCI and Essex, participated in the trial.
Two witnesses testified at trial: Wallace Slatinsky, former executive director of Greenway and a principal of GCI,
The district court first scrutinized Judge O‘Brien‘s opinion and determined that the state court had, in fact, already
[C]ounsel [hired by Essex] . . . filed a motion to intervene on behalf of Winco, which the state court eventually denied as moot as it found Greenway to be Winco‘s successor. Accordingly, Essex or Winco who was in privity with Essex as its insured was involved in the underlying action.
Id. (emphasis added).
The district court thus held that Winco was “involved in the underlying action” and that Essex was in privity with Winco as a result of the insurer-insured relationship that existed between them. Finally, the district court found that the fourth Veltri factor – that Essex had a full and fair opportunity to litigate the issue before the state court – had also been met:
[Essex] filed a brief with regard to the motion to
amend the caption, and its counsel was present at the hearing. The state court judge provided him the opportunity to participate at the hearing, and an opportunity to submit law after the hearing. He was also provided the opportunity to object to exhibits, questions, and witnesses.
Id. at 6 (internal citations omitted).
The district court therefore found that it was “precluded from readdressing th[e] issue” of whether GCI is a successor in interest to Winco and held that, pursuant to the state court order, GCI is a successor in interest to Winco. As a result, on July 18, 2005, Judge Munley issued a Memorandum and Verdict in favor of GCI, finding that issue preclusion applied and that, pursuant to Judge O‘Brien‘s state court ruling, Essex is therefore liable to defend and indemnify GCI in Maione‘s state court action. Because it found issue preclusion applicable, the district court did not make its own determination, on the merits, whether GCI is a successor in interest to Winco. This timely appeal followed.
VI.
Essex argues before us that the requirements for applying issue preclusion in the present context have not been met. To determine whether Essex is barred by the doctrine of issue preclusion from disputing its liability to defend and indemnify GCI because of the state court order, we must look to the law of the adjudicating state, which is Pennsylvania. See O‘Leary v. Liberty Mutual Ins. Co., 923 F.2d 1062, 1064 (3d Cir. 1991); Gregory v. Chehi, 843 F.2d 111, 116 (3d Cir. 1988). Under Pennsylvania law, issue preclusion applies only where the following four requirements are satisfied:
(1) the issue decided in the prior adjudication was identical with the one presented in the later action; (2) there was a final judgment on the merits; (3) the party against whom the plea is asserted was a party or in privity with a party to the prior adjudication; and (4) the party against whom it is asserted has had a full and fair opportunity to litigate the issue in question in a prior action.
Shaffer v. Smith, 543 Pa. 526, 529, 673 A.2d 872, 874 (Pa. 1996); Safeguard Mut. Ins. Co. v. Williams, 463 Pa. 567, 574, 345 A.2d 664, 668 (Pa. 1975); see also Greenleaf v. Garlock, Inc., 174 F.3d 352, 357-358 (3d Cir. 1999); Dici v. Commonwealth of Pa., 91 F.3d 542, 548 (3d Cir. 1996). The party asserting issue preclusion, here appellees GCI and Maione, bear the burden of proving its applicability to the case at hand. Dici, 91 F.3d at 548.
Essex argues that none of the four Shaffer (Greenleaf) criteria is satisfied in this case. Essex‘s arguments with respect to the first two Shaffer requirements have little merit and we readily dispose of them.
Essex‘s arguments is directly contradicted by the language of the state court decision. The state court, whether right or wrong, clearly held – as a matter of substantive law – that GCI was a successor in interest to Winco: “Greenway Center, Inc. is the successor in interest to Winco Acquisition, Inc. by virtue of the Reorganization Plan confirmed by the Bankruptcy Court.” It is true that the state court opinion lacks a detailed discussion of successor in interest law. However, the state court did provide some reasoning for its holding by citing Winco‘s proposed bankruptcy plan, which provided that, upon confirmation, all Winco stock was to be vested in GCI.
Essex also argues that Judge O‘Brien‘s state court decision is not a “final judgment” for the purposes of applying the doctrine of issue preclusion. In Shaffer, the Pennsylvania
[F]or purposes of issue preclusion (as distinguished from merger and bar), “final judgment” includes any prior adjudication of an issue in another action that is determined to be sufficiently firm to be accorded preclusive effect.
Shaffer, 673 A.2d at 875 (quoting Restatement (Second) of Judgments § 13 (1982)).
We do not agree with Essex‘s argument that the state court opinion is not a “final judgment.” There is nothing “tentative” or non-final about Judge O‘Brien‘s decision. See Greenleaf, 174 F.3d at 358 (quoting Restatement (Second) of Judgments § 13 comment g (1982)). Nor is there anything to suggest that the state court decision, which was reached upon written submissions by all parties and an evidentiary hearing, was not adequately deliberate and firm. Id. We therefore conclude that the state court decision was a “final judgment” for issue preclusion purposes.
We now turn to the third and fourth Shaffer requirements – i.e., that the party against whom “issue preclusion” is asserted was a party, or in privity with a party, in the prior adjudication, and that it had a full and fair opportunity to litigate the issue in
VII.
Was Essex a Party, or in Privity with a Party, to the State Court Action?
It is undisputed that Essex was not a party to the state court action presided over by Judge O‘Brien. The parties in that action were Maione and GCI. The question that arises now, therefore, is whether Essex was “in privity with a party to the prior adjudication.” Shaffer, 673 A.2d at 874 (emphasis added).
The district court concluded that, because Winco filed a Petition to Intervene in opposition to Maione‘s motion to amend the caption, Winco was “involved in the underlying action,” Dist. Ct. Op. at 5, and that therefore Essex, as Winco‘s insurer, was in privity with a party – i.e., Winco, in the state court action. However, the record reveals that Winco never was, in fact, a party to the state court action. More importantly, even if Winco had been a party, Essex could not, and would not, be deemed in privity with Winco, despite their insurer-insured relationship, since Winco and Essex had conflicting interests in the outcome of Maione‘s motion. See Vaksman v. Zurich General Accident & Liability Insurance Co., 172 Pa. Super. 588, 94 A.2d 186 (1953); Ranger Ins. Co. v. General Acci. Fire & Life Assurance Corp., 800 F.2d 329 (3d Cir. 1986). Hence, we disagree with the district court‘s conclusion that Essex was in
The district court, without discussion or analysis, stated that Winco was “involved in the underlying action,” apparently finding this sufficient to render it a party for “issue preclusion” purposes. However, as we remarked above, it is clear that Winco was never a named party to the state court action. We recognize that Winco filed a Petition to Intervene to oppose Maione‘s motion to amend. However, Winco‘s Petition to Intervene was “dismissed as moot.” The unambiguous meaning of Judge O‘Brien‘s ruling is that Winco was not permitted to interpose a response to Maione‘s motion to amend the caption. That Winco‘s attorney may have had an opportunity to participate in the proceeding before Judge O‘Brien in order to oppose Maione‘s motion, did not render it a party to the state court action for the purposes of issue preclusion.
More importantly, even if Winco could be considered a party to the state court action by virtue of its Petition to Intervene, no privity would exist between Essex and Winco, despite their relationship as insurer and insured, because, as demonstrated infra, they had conflicting interests in the outcome of Maione‘s motion to amend the caption.
Privity is defined as a “mutual or successive relationship to the same rights of property. In its broadest sense, ‘privity’ is defined as mutual or successive relationships to the same right
The Pennsylvania Supreme Court has held that, in general, for issue preclusion purposes, an insurer is in privity with its insured. See Dally v. Pennsylvania Threshermen & Farmers’ Mutual Casualty Insurance Co., 374 Pa. 476, 478-79, 97 A.2d 795 (1953). However, the Pennsylvania Superior Court has recognized an important exception to this rule: where the insurer‘s interests conflict with those of its insured, the insurer is not later barred by issue preclusion from presenting its own position.
In Vaksman v. Zurich General Accident & Liability Insurance Co., 172 Pa. Super. 588, 94 A.2d 186 (1953), the plaintiff, Vaksman, had a policy that covered injuries “caused by accident.” Id. at 187 (emphasis added). Vaksman was sued by a third party, Mousley, who claimed that Vaksman had negligently injured Mousley. The insurer, Zurich, refused to defend the action, contending that it was not liable under the policy because, Zurich alleged, Vaksman had intentionally – not accidentally – injured Mousley. Mousley then obtained a judgment against Vaksman, who turned around and sued Zurich to recover the monies it had paid to Mousley. When Zurich
The Pennsylvania Superior Court held that, while insurers and insureds generally are in privity for purposes of issue preclusion, in the case before it such a finding would be erroneous because, in the prior adjudication, the interests of the insurer, Zurich, and its insured, Vaksman, conflicted on the point in issue – i.e., intentional versus negligent action. Id. at 188. Noting that in the prior adjudication it was in Zurich‘s interest that the Vaksman‘s action be characterized as “intentional” while it was in Vaksman‘s interest that it be characterized as “accidental,” the court reasoned that it would be unfair to bind Zurich to the prior judgment when Zurich, by virtue of its duty to its insured, could not assert the position that was in its best interest in that action. Therefore, the court held that the insurance company, Zurich, was not in privity with its insured, Vaksman, and thus issue preclusion did not apply. Id. at 188-89.
This court applied the principle of Vaksman in Ranger Ins. Co. v. General Acci. Fire & Life Assurance Corp., 800 F.2d 329 (3d Cir. 1986). Ranger involved the following facts. An accident victim named Gaylor was seriously injured while riding in a van driven by a Delaware County employee. The County
We held that issue preclusion did not prevent Ranger from re-litigating the marital-status issue, despite the fact that Ranger‘s insured, the County, had been a party to the settlement hearing at which the state court expressly held that there was no common law marriage. Relying on Vaksman, we held that issue preclusion was not appropriate because, in the context of the settlement proceeding, Ranger‘s interest vis-a-vis the marital-status issue conflicted with the County‘s interest:
The purpose of the proceeding was to seek court approval of a settlement proposed by the county and Gaylor, and it was in that proceeding that Rossi presented her marital petition. Because it
was in the county‘s interest that the court approve the proposed settlement and because the record makes clear that the court‘s granting of Rossi‘s petition would have jeopardized that settlement, it was in the county‘s interest that the court reject the petition. Yet, it clearly was in Ranger‘s interest that the court grant Rossi‘s petition. This was so because Rossi had taken out a policy with General that extended benefits to the insured‘s spouse and thus might have covered Gaylor if he were determined to be Rossi‘s spouse. And, if General‘s policy had covered Gaylor, General -- and not Ranger -- might have been liable to compensate Gaylor for the injuries for which he had sued Delaware County.
Ranger and Delaware County therefore had conflicting interests vis-a-vis the disposition of Rossi‘s marital-status petition. Thus we conclude that under Pennsylvania law Ranger and the county were not in privity with respect to the adjudication of the marital-status petition. The district court erred, therefore, in concluding that that prior adjudication collaterally estops Ranger from litigating the issue in its suit against General.
Id. at 332-33 (emphasis added).
Vaksman and Ranger control the outcome of the present case. Even assuming that Essex‘s insured, Winco, was a party to the underlying state action (and it is evident that Winco was
Winco had an interest in opposing the first of these alternatives – i.e., “Winco Acquisition, Inc. d/b/a Greenway Center” because if the caption were thus amended, it would make Winco subject to liability as the defendant in the case. However, Winco had, at best, no interest at all in whether the caption was changed to “Greenway Center, Inc. as successor in interest to Winco Acquisition, Inc” inasmuch as such an amendment would have no bearing on Winco‘s liability. In such a case, Essex would be obligated to defend and indemnify Winco‘s successor in interest, GCI.7
Essex, on the other hand, had a strong interest in opposing both of the proposed amendments, for Essex would be
In her brief, Maione also argues that Essex was in privity with GCI in the underlying state court action. Maione argues that “Essex had a mutual and contractual interest with GCI in the state court action to the extent that it assigned the counsel who entered his appearance and participated in the state court action.” We reject this argument. It is true that Essex mistakenly retained counsel on behalf of GCI in 1999 before it became aware that GCI and Winco were distinct entities. But counsel initially retained by Essex to represent GCI withdrew his appearance on behalf of GCI more than two years before Maione even filed her motion to amend. When Maione filed her motion to amend, Essex retained counsel solely to protect Winco‘s interests. See supra note 4.
We therefore hold that, because Essex was not a party, nor in privity with GCI or any other party, to the underlying state court action, the doctrine of issue preclusion does not
Did Essex Have a “Full and Fair” Opportunity to Litigate the Issue of GCI‘s Successorship to Winco?
It is axiomatic that, because Essex was not a party, or in privity with a party, to the underlying state court action, it also did not have a full and fair opportunity to litigate the issue whether GCI was a successor in interest to Winco. Both Maione and GCI argue, and the district court found, that Frank Baker, the attorney Essex retained to intervene in the state court proceedings on behalf of Winco, had the opportunity to participate in the hearing on Maione‘s motion to amend, object to exhibits and questions, and give testimony. Whether or not this is true, it is entirely beside the point: Baker was retained to represent the interests of Winco and, as we have discussed, Winco‘s interests were far different from those of Essex. As a result, at no time during any of the proceedings did Essex have an opportunity to present its own position that GCI was not a successor in interest to Winco.
IX.
Because the district court found issue preclusion applicable, it did not reach the merits of the issue whether GCI is, under substantive Pennsylvania law, a successor in interest to Winco for the purposes of assuming Winco‘s liabilities and obtaining rights under its insurance contract with Essex. We will therefore vacate the District Court‘s judgment in favor of