Appendix — Texas Eastern Transmission Corp. v. Fidelity & Casualty Insurance
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Supreme Court, U.S.
FILED
93207 0 JUN 24 1994
i a.
ee
IN THE
Supreme Court of the Gnited States
OCTOBER TERM, 1993
95
~~
TEXAS EASTERN TRANSMISSION CORPORATION,
Petitioner,
Vv.
FIDELITY & CASUALTY INSURANCE COMPANY OF
NEw York, et al.,
Respondents.
On Petition For A Writ Of Certiorari
To The United States Court Of Appeals
For The Third Circuit
APPENDIX
PETER J. NICKLES
Counsel of Record
COLEMAN S. HICKS
CurTIS A. BRADLEY
OFr COUNSEL: JACK L. GOLDSMITH
Covington & Burling
1201 Pennsylvania Ave., N.W.
Post Office Box 7566
Washington, D.C. 20044
(202) 662-6000
Attorneys for Petitioner
CHARLES ALAN WRIGHT
727 East 26th Street
Austin, Texas 78704
(512) 471-7188
TABLE OF CONTENTS
Order granting extension of time
to July 1, 1994, U.S. Supreme
Court, dated April 21, 1994 ... 2. ene. A-1
Order staying proceedings,
U.S. District Court for
the Eastern District of
Pennsylvania, dated
SN eee A-2
Order denying petition for
rehearing, U.S. Court of
Appeals for the Third
Circuit, dated February 3, 1994 ............ A-4
Opinion 1, U.S. Court of Appeals
for the Third Circuit, dated
I Sr ee yk od A-6
Opinion 2, U.S. Court of Appeals
for the Third Circuit, dated
Ee a A-49
Order vacating panel’s opinion
and judgment, U.S. Court of
Appeals for the Third Circuit,
ee A-69
Order staying mandate, U.S.
Court of Appeals for the
Third Circuit, dated
A‘ Th, THe 6 ks ik 3 ee eae A-72
Opinion, U.S. Court of Appeals
for the Third Circuit, dated
pGay 26, TS08 << 6 a ee a es A-76
Notice of Appeal, U.S. District
Court for the Eastern District
of Pennsylvania, dated
Aug 6, FFE. on ead Se eee A-104
Summary Judgment Opinion,
U.S. District Court for the
Eastern District of Pennsylvania,
Gates Gey 9, THG6 os: er eee ena SG A-106
Partial transcript and minutes
of proceeding before Judge
VanArtsdalen, U.S. District
Court for the Eastern District
of Pennsylvania, dated
september 135, 1908 | wks a bee A-282
Aluminum Co. of America v.
Admiral Insurance Co.,
No. C93-32C (W.D. Wash.
Age. 9, 1993) . 06 sks eee A-313
ii
Murphy Oil USA, Inc. v.
United States Fidelity
& Guaranty Co., No. 91-1157,
1992 WL 456701 (W.D. Ark.
ee A-316
Mobil Corp. v. Abeille
General Insurance Co.,
No. H-89-3877, 1900
WL 504828 (S.D. Tex.
Nov. 6, 1990), appeal
dismissed, 984 F.2d 664
ee a be kh ewe Os A-332
List of Texas Eastern
Transmission Corporation’s
es ok oss 6 no eee ee eS A-338
A-1
SUPREME COURT OF THE UNITED STATES
No. A-790
Texas Eastern Transmission Corporation
Petitioner
v.
Fidelity and Casualty Insurance Company of
New York, et al.
OKDER
UPON CONSIDERATION of the application of counsel
for the petitioner,
IT IS ORDERED that the time for filing a petition for a
writ of certiorari in the above-entitled case, be and the same
is hereby, extended to and including July Ist, 1994.
Associate Justice of the Supreme
Court of the United States
Dated this 21st day of April, 1994
A-2
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
FIDELITY AND CASUALTY
COMPANY OF NEW YORK
v. : CIVIL ACTION
: NO. 92-4804
TEXAS EASTERN TRARSREESEONS :
CORPORATION, et al.
TEXAS EASTERN a |
CORPORATION
v. : CIVIL ACTION
93-15
FIDELITY AND CASUALTY
COMPANY OF NEW YORK, et al.
ORDER
After a conference held on the record on April 21,
1994, it is ORDERED as follows:
1. The parties, either jointly or separately
shall submit, as soon as practical, by letter, a status report
as to any and all outstanding motions pending in Civil
Actions 92-4804 and 93-15, together with a statement as to
the date of filing of said motions, and the date of filing any
answer, response, reply, or other pleading to said motions,
if any, by any and all parties.
2. Upon representations by Texas Eastern
Transmission Corporation that it will seek a writ of
A-3
certiorari from The Supreme Court of the United States to
review the final decisions of the United States Court of
Appeals for the Third Circuit In re Texas Eastern
Transmission Corporation PCB Contamination Insurance
Coverage Litigation, MDL 764, Civil Actions 92-4804 and
93-15 shall be stayed pending final decision by The
Supreme Court of the United States, or until further order
of this court. This order staying proceedings is without
prejudice to any party to seek to remove the stay if such
party, in good faith, thinks it will be seriously prejudiced by
further delay or that the petition for certiorari is not being
promptly filed or processed.
3. While the present stay of Civil Actions 92-
4804 and 93-15 is in effect, no party in these actions shall
file in any court any additional! action seeking a
determination of insurance coverage by or for Texas Eastern
Transmission Corporation for PCB contamination,
irrespective of whether further claims are filed or asserted
by third parties against Texas Eastern Transmission
Corporation for PCB contamination damage; provided,
however, that during the period of this stay the statute of
limitations for filing any action to determine such insurance
coverage issue shall be tolled.
BY THE COURT:
Donald W. VanArtsdalen, S.J.
April 21, 1994
A-4
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 92-1638
IN RE TEXAS EASTERN
TRANSMISSION CORPORATION
PCB CONTAMINATION INSURANCE
COVERAGE LITIGATION
SUR PETITION FOR REHEARING
Present: BECKER, STAPLETON, MANSMANN,
GREENBERG, HUTCHINSON, SCIRICA, COWEN,
NYGAARD, ALITO, ROTH, LEWIS and ALDISERT,*
Circuit Judges.
The petition for rehearing filed by appellant in the
above entitled case having been submitted to the judges who
participated in the decision of this court and to all other
available circuit judges of the circuit in regular active
service, and no judge who concurred in the decision having
asked for rehearing, and a majority of the circuit judges of
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the circuit in regular active service not having noted for
rehearing by the court in banc, the petition for rehearing is
denied. Judge Greenberg would have granted rehearing.
BY THE COURT,
Circuit Judge
*Senior Circuit Judge Aldisert voted only as to panel
rehearing.
Filed January 10, 1994
OPINION 1 OF 2
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 92-1638
IN RE: TEXAS EASTERN TRANSMISSION CORP. PCB
CONTAMINATION INSURANCE COVERAGE LITIGATION
(MDL No. 764)
ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES,
LTD.; NATIONAL SURETY CORPORATION
¥.
TEXAS EASTERN TRANSMISSION CORPORATION;
FIDELITY & CASUALTY INSURANCE COMPANY OF NEW
YORK; CERTAIN UNDERWRITERS AT LLOYDS
OF LONUON, INCLUDING THE INSURANCE COMPANY OF
IRELAND; AETNA CASUALTY AND SURETY COMPANY;
AMERICAN HOME ASSURANCE COMPANY; BOSTON OLD
COLONY INSURANCE COMPANY; CONTINENTAL
CASUALTY INSURANCE COMPANY; FIRST STATE
INSURANCE COMPANY; HIGHLANDS INSURANCE
COMPANY; THE HOME INSURANCE COMPANY;
INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF THE STATE OF
PENNSYLVANIA; INTERNATIONAL INSURANCE COMPANY;
LEXINGTON INSURANCE COMPANY; MIDLAND
INSURANCE COMPANY; MUTUAL MARINE INSURANCE
COMPANY; PRUDENTIAL REINSURANCE COMPANY;
RANGER INSURANCE COMPANY; REPUBLIC INSURANCE
COMPANY; STONEWALL INSURANCE COMPANY;
PENNSYLVANIA INSURANCE GUARANTY ASSOCIATION;
UNITED STATES OF AMERICA; UNITED STATES
ENVIRONMENTAL PROTECTION AGENCY
(D.C. Civil No. 88-02126)
4
i
A-7
THE FIDELITY & CASUALTY CO. OF NEW YORK
v.
THE TEXAS EASTERN TRANSMISSION CORP.
(D.C. Civil No. 88-05039)
TEXAS EASTERN TRANSMISSION CORPORATION
v.
FIDELITY AND CASUALTY COMPANY OF NEW YORK;
ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES,
LTD.; AETNA CASUALTY AND SURETY COMPANY;
AMERICAN HOME ASSURANCE COMPANY, a/k/a
AMERICAN HOME INSURANCE COMPANY; BOSTON OLD
COLONY INSURANCE COMPANY; CIGNA INSURANCE
COMPANY; CONTINENTAL CASUALTY COMPANY;
EMPLOYERS MUTUAL CASUALTY COMPANY; FIRST
STATE INSURANCE COMPANY; HIGHLANDS INSURANCE
COMPANY; THE HOME INSURANCE COMPANY; THE
INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF THE STATE OF
PENNSYLVANIA; INTERNATIONAL INSURANCE COMPANY;
LEXINGTON INSURANCE COMPANY; MIDLAND
INSURANCE COMPANY; NATIONAL SURETY
CORPORATION; PRUDENTIAL REINSURANCE COMPANY;
RANGER INSURANCE COMPANY; REPUBLIC INSURANCE
COMPANY; STONEWALL INSURANCE COMPANY; UNITED
STATES FIRE INSURANCE COMPANY; CERTAIN
UNDERWRITERS AT LLOYD’S, LONDON and CERTAIN
LONDON MARKET INSURANCE COMPANIES
(D.C. Civil No. 88-05707)
Texas Eastern Transmission Corporation,
Appellant
Appeal from the United States District Court
for the Eastern District of Pennsylvania
A-8
Argued
April 7, 1993
Before: MANSMANN, ALITO and ALDISERT,
Circuit Judges.
Reargued
September 30, 1993
(Filed January 10, 1994)
Ee
OPINION OF THE COURT
MANSMANN, Circuit Judge.
This is a companion opinion to Fidelity & Casualty Co.
of New York v. The Texas Eastern Transmission Corp. , 15
F.3d 1249 (3d Cir. 1994), an opinion filed today which
affirms the district court’s determination of liability in three
cases consolidated for appeal before us. The three cases are
Fidelity & Casualty Co. of New York v. The Texas Eastern
Transmission Corp. , (hereinafter the "F & C" action)
originally filed in the Northern District of Texas, Texas
Eastern Transmission Corp. v. Fidelity and Casualty Co. of
New York et al., (hereinafter the "Texas Eastern" action)
originally filed in a Texas state court and later removed to
the Southern District of Texas, and Associated Electric &
Gas Insurance Services Ltd. et al. v. Texas Eastern
Transmission Corp. et al. (hereinafter the "AEGIS" action)
filed in the Eastern District of Pennsylvania. All three
cases were later assigned by the Multi-District Litigation
Panel to the district court below.
This opinion discusses the question of subject matter
jurisdiction in the Texas Eastern action and the AEGIS
action. We also address the question of jurisdiction in the
F & C case to the extent that its jurisdiction based on
diversity is impacted by our discussion of subject matter
jurisdiction in the other two cases. That our discussion has
to be bifurcated in two separate opinions results from a
procedural anomaly: Texas Eastern sought rehearing in
only two of the three cases — Texas Eastern and AEGIS —
and only on the question of subject matter jurisdiction.
A-10
At issue in this panel rehearing is the district court’s
exercise of subject matter jurisdiction in Texas Eastern and
AEGIS arising from insurance coverage for the cost of toxic
PCB clean-up. The claims were filed after Texas Eastern
Transmission Corporation’s release, discharge and disposal
into the environment of PCB-contaminated substances in the
course of operating a natural gas pipeline extending from
Texas and Louisiana to New Jersey.
Texas Eastern, the insured, appealed the decision of the
district court, which granted summary judgment to Texas
Eastern’s insurance carriers, primarily on the basis that
Texas Eastern breached its duty to provide the carriers
timely notice of matters for which it would seek coverage,
and in this way prejudiced the carriers. In Re Texas
Eastern Transmission Corp. PCB Contamination Insurance
Coverage Litigation, No. MDL-764 (E.D. Pa. July 9,
1992). We affirmed in an unreported opinion filed May 28,
1993, after confirming that the district court had subject
matter jurisdiction over all three cases. In the first of the
three actions, the "F & C" action, subject matter
jurisdiction was based on diversity of citizenship, 28 U.S.C.
§ 1332, and was not and is not now being contested by
Texas Eastern. Subject matter jurisdiction in the remaining
two actions, the "AEGIJS” action and the "Texas Eastern"
action, was derived from the Foreign Sovereign Immunities
Act, 28 U.S.C. § 1330 (original) and § 1441(d) (removal).
Thereafter, Texas Eastern filed a petition for rehearing
chailenging subject matter jurisdiction in the two cases. On
August 18, 1993, we ordered panel rehearing and stayed the
mandate in all three cases consolidated in this appeal. On
January 6, 1994, we vacated our unreported opinion.
This opinion addresses the jurisdictional issues raised in
the petition for rehearing, which was directed only to the
set eatin hae ianD
IRA MAA SOND tee Solaray ecw BT hha iD hei et OP ian HRA IY jth UiaANaNiiiibinb ae: 8
A-11
question of subject matter jurisdiction in AEGIS and Texas
Eastern. In addition, because Texas Eastern contended on
appeal and reasserted on rehearing that the district court
lacked jurisdiction over the counterclaim defendants in the
F & C case, and hence should have stayed F & C in favor
of an allegedly more comprehensive action which Texas
Eastern had commenced in a Texas state court, we address
this challenge to the district court’s jurisdiction in F & C.
In a separate opinion filed simultaneously with this, we in
effect reinstate the portion of our earlier opinion addressing
the substantive merits of the issues on appeal from the order
of the district court, as these issues were not challenged in
the petition and were not the subject of the rehearing. See
Dunn v. Hovic, 1 F.3d 1362, 1993 U.S. App. LEXIS 20182
(July 27, 1993) (reinstating earlier opinion as to matters not
subject of rehearing in banc); Dunn v. Hovic, | F.3d 1371,
1993 U.S. App. LEXIS 19482 (July 27, 1993) (addressing
only those issues which were subject of rehearing in banc).
I.
A brief statement of the facts appears in the related
opinion filed simultaneously with this one. A more detailed
statement of the facts appears in the district court’s opinion.
Here we outline the nature of the three cases in question
and the jurisdictional challenges raised in the petition for
rehearing.
After Texas Eastern’s August 1987, notice to its
insurers that it was negotiating with federal and state
agencies over the PCB contamination of several of its
properties, Fidelity & Casualty Company of New York,
Texas Eastern’s primary excess liability insurer, filed the
first of the three actions, the "F & C action," in the United
States District Court for the Northern District of Texas,
seeking a declaratory judgment disclaiming liability.
A-12
Subject matter jurisdiction was premised on diversity and is
not challenged. Texas Eastern unsuccessfully moved to
dismiss or stay the F & C action in favor of a New Jersey
State court action which Texas Eastern had already
commenced against all of its insurers.’
In the second action, the "AEG/S” action, two of Texas
Eastern’s excess insurers, Associated Electric and Gas
Services, Ltd. and National Surety Corporation, filed a
comprehensive declaratory judgment action against Texas
Eastern and its other insurance carriers, primary or excess,
in the United States District Court for the Eastern District
of Pennsylvania. The district court premised original
subject matter jurisdiction over the AEGIS case on the
Foreign Sovereign Immunities Act (FSIA), 28 U.S.C.
§ 1330, based on the presence as a party defendant of the
Insurance Company of Ireland, Lid., (ICI). ICI is a
"foreign state" under 28 U.S.C. § 1603{a) of the FSIA
having no immunity with regard to the commercial claims
brought against it in the AEG/S action. The Immunities Act
provides for federal jurisdiction in civil commercial actions
brought "against" a foreign state.
The third and final action, the "Texas Eastern” action,
was commenced by Texas Eastern in a Texas state court
against all of its insurers, seeking declaratory judgment and
damages. This action was, in effect, a refiling of the earlier
dismissed action which Texas Eastern had initiated in the
New Jersey state court. Pursuant to 28 U.S.C. § 1441(d)
of the FSIA, ICI removed Texas Eastern to the United
/ The action in the New Jersey state court was titled Texas Eastern
Transmission Corporation v. Fidelity & Casualty Company, and was
docketed as No. WO-30685-87 (N.J. Sup. Ct., filed December 19,
1987). It was dismissed on March 17, 1988, on the ground of forum
non conveniens. Texas Eastern did not appeal the dismissal.
<r er
ee Wee ae A,
A-13
States District Court for the Southern District of Texas.
Section 1441(d) permits removal of a civil action "against a
foreign state" as the term "foreign state" is defined in 28
U.S.C. § 1603.
The F & C action was transferred to the federal district
court in eastern Pennsylvania and consolidated with AEGIS
for pretrial proceedings. The Texas Eastern action was also
consolidated for pretrial purposes with AEGIS after it was
removed to the federal court.
In seeking vacatur of the district court’s judgment in all
three cases and to adjudicate its coverage claims in state
court, Texas Eastern argues that the district court
erroneously assumed FSIA jurisdiction; hence, it argues that
the Texas Eastern case should have been remanded to the
Texas state court, the AEGIS case should have been
dismissed for lack of subject matter jurisdiction, and the
F & C case should have been sent back to the Texas federal
court where it likely would have been dismissed or stayed
in deference to the state court proceeding.
Texas Eastern does not challenge diversity jurisdiction
between the original parties in the F & C case, yet in our
view we deem it significant that in the F & C case, Texas
Eastern committed itself to two important actions: (1) it
asserted counterclaims against F & C and (2) it joined all
other parties in these combined cases as co-defendants in the
counterclaims. What started out as an action between only
The Fidelity & Casualty Co. of New York and Texas
Eastern then became, through Texas Eastern’s actions, a
case involving all the carriers in this litigation.
On appeal from the district court’s grant of summary
judgment in favor of the insurers, however, Texas Eastern
asserts a contention that it did not raise below: now, for
|
A-14
the first time, it argues that jurisdiction over the
counterclaim was improper. Texas Eastern further asserts
that, assuming ICI is a foreign state within the meaning of
§ 1603, FSIA jurisdiction over AEGIS was precluded by
mandatory realignment of the parties, which would have
adjusted ICI’s nominal status as defendant to plaintiff.
Furthermore, Texas Eastern asserts that ICI contractually
waived any right it had under the FSIA to remove in the
Texas Eastern case.
We have jurisdiction over a final decision of the district
court pursuant to 28 U.S.C. § 1291. We rehear matters
which were the subject of our opinion of May 28, 1993,
pursuant to Federal Rules of Appellate Procedure 35 and
40.
Il.
We address the question of jurisdiction in each of the
three cases seriatim. The substantive merits of the district
court’s holding in favor of the insurance carriers is
addressed in an opinion filed simultaneously with this one.
Fidelity & Casualty Co. of New York v. The Texas Eastern
Transmission Corp., 15 F.3d 1249 (3d Cir. 1994).
A. The F & C Case
On December 11, 1987, the F & C declaratory
judgment action against Texas Eastern was commenced in
federal district court in Texas. Texas Eastern filed an
answer with counterclaims against virtually all of its excess
insurers on December 15, 1988, after the F & C case had
been transferred to the Eastern District of Pennsylvania and
consolidated with the remaining two related cases.
Although diversity jurisdiction between the two original
parties, F & C and Texas Eastern, is undisputed, Texas
A-15
Eastern now claims that the district court lacked jurisdiction
over its counterclaims because Texas Eastern failed to state
a basis in the Federal Rules of Civil Procedure for adding
the excess insurers, failed to seek leave of court to join
them, and did not execute service of process upon them;
hence they were not made parties to the suit and the F & C
action involved only the policies issued by its primary
liability carrier.2 Fidelity and Casualty Co. of N.Y. v.
Texas Eastern Transmission Corp., No. 88-5039.
Texas Eastern mounts the following argument. The
complaint by F & C tracked a very narrow compass because
it involved only primary carrier liability. Outstanding at the
same time in two other lawsuits was the question of liability
of both primary and excess carriers. Therefore, had not the
district court erroneously assumed it had jurisdiction over
Texas Eastern’s excess liability carriers in F & C, the
district court would have dismissed the F & C law suit in
favor of the more comprehensive state court action.»
2 ‘The district court’s decision at p. 7 granted summary judgment ‘on
all claims against [the carriers],” and the order and judgment of the
district court was entered in favor of “all the carriers and against Texas
Eastern." Docket No. 88-5039, second entry of July 10, 1992
(emphasis added). Texas Eastern’s failure to appeal that entry of
judgment in the F & C action may be construed as a waiver of its
present contention that the excess carriers were not proper parties in the
F & Caction. Because we find ample other reason to reject Texas
Eastern’s jurisdictional challenge to the F & C case, the issue of Texas
Eastern’s waiver need not dispose of this matter.
¥ The panel is in unanimous agreement that at this very late juncture
in the prosecution of the F & C action it would be extremely imprudent
to remand this cause on the basis of what amounts to conjecture on the
part of Texas Eastern, which cannot call into question the competence of
a federal court to resolve matters of substantive state law. Although
(continued...)
A-16
l.
In deciding whether the excess insurers were parties to
the F & C action, we note preliminarily that a party is
deemed to have consented to personal jurisdiction if the
party actually litigates the underlying merits or demonstrates
a willingness to engage in extensive litigation in the forum.
In Re Real Estate Title and Settlement Services Antitrust
Litigation, 869 F.2d 760, 771 (3d Cir.), cert. denied, 493
U.S. 821, 110 S. Ct. 77, 107 L. Ed. 2d 44 (1989). The
F & C counterclaim defendants actively litigated the F & C
action, failed to move to dismiss Texas Eastern’s
counterclaim for lack of service before litigating the
motions for summary judgment, and, in fact, moved for
summary judgment on other grounds.* Thus, we may
>(...continued)
Judge Alito disagrees with the majority opinion on other grounds, he
joins the majority in this regard.
* In a supplemental stipulation regarding cross-claims and
counterclaims entered into by F & C and the excess insurers, and
approved and ordered by the district court on January 17, 1989, F & C
and the excess insurers preserved the excess insurers’ cross-claims in
the F & C action. With the exception of the initial pleadings, the excess
insurers failed to object to lack of service or in personam jurisdiction in
the F & C case. In its answer and counterclaim, Texas Eastern asserted
that "/Ajll of Texas Eastern’s insurers must bear, jointly and severally,
all indemnity, damages, defense costs, costs, and reasonable attorney’s
fees resulting from any of the foregoing claims,” belying Texas
Eastern’s own belief that its excess insurers were party to the F & C
action, and undermining Texas Eastern’s attempt to separate its claims
against F & C from its claims against the excess insurers. Furthermore,
Texas Eastern’s motion for leave to amend pleadings included the excess
insurers in the caption. Not only did the excess insurers respond on the
merits, but the district court ruled, in an order of July 25, 1991, to
dismiss ali or specific claims against certain of the excess insurers,
(continued...)
isspsaeibeaiiaaaaiiaiai
A-17
infer that the counterclaim defendants effectively waived the
defense of lezk of personal jurisdiction based on the absence
of service of process by acquiescing in personal jurisdiction.
See Zelson v. Thomforde, 412 F.2d 56, 58-59 (3d Cir.
1969); United States v. Article of Drug, 362 F.2d 923,
926-27 (3d Cir. 1966). Since service of process is to
provide notice of the pendency of the action, which the
excess carriers clearly had, and goes to the question of in
personam jurisdiction, in which the excess carriers have
clearly acquiesced, the district court’s exercise of personal
jurisdiction over the excess carriers in the F & C action
cannot be nullified by Texas Eastern’s failure to cause
summonses to be served on them. The district court
implicitly adopted such a holding when it entered judgment
in the F & C action "in favor of all carriers," and we affirm
this resolution of the question of personal jurisdiction in
F&C.
y I
Having disposed of contentions regarding personal
jurisdiction, we must now consider the claim that the
district court lacked subject matter jurisdiction over the
non-diverse counterclaim defendants in the F & C action.
In its counterclaim, Texas Eastern alleged ancillary
jurisdiction over the excess insurers. Ancillary subject
matter jurisdiction may be exercised over additional party
defendants to a compulsory counterclaim, or over third
“(.. .continued)
evidencing its assumption that the excess insurers were indeed parties to
the F & C action. Finally, the district court’s order and final judgment
of July 9, 1992, granted “final judgment on all claims in favor of all
insurance carriers.” (Emryhasis added.) This order was individually
entered on the docket in all three cases, including the F & C action.
Docket No. 88-5039, second entry of July 10, 1992.
A-18
party defendants. See Great Lakes Rubber Corp. v. Herbert
Cooper Co., 286 F.2d 631, 633-34 (3d Cir. 1961) (ancillary
jurisdiction extends to subject matter of counterclaim arising
out of transaction or occurrence which is subject matter of
opposing party’s claim of which court has jurisdiction, and
such counterclaim is "compulsory"); Field v.
Volkswagenwerk AG, 626 F.2d 293, 299 (3d Cir. 1980) (no
independent jurisdictional basis required for third party
claim when diversity jurisdiction obtained over original
claim). Nevertheless, Texas Eastern now claims that the
district court’s exercise of subject matter jurisdiction over
the counterclaims against the non-diverse excess insurers
was a form of pendent party jurisdiction precluded by the
Supreme Court in Finley v. United States, 490 U.S. 545,
109 S. Ct. 2003, 104 L. Ed. 2d 593 (1989) (declining to
exercise pendent party jurisdiction under Federal Tort
Claims Act unless statute conferring jurisdiction over
primary claim explicitly confers jurisdiction over pendent
party claim). Texas Eastern argues that neither the
diversity statute, 28 U.S.C. § 1332, upon which jurisdiction
over the original claim lies, nor any other arguably
applicable federal statute, authorizes such jurisdiction over
the excess insurers.?’
*% Texas Eastern further claims that the district court could have
assumed personal jurisdiction over the excess insurers only by virtue of
the discretionary authority represented in Federal Rule of Civil
Procedure 13(h). Rule 13(h) provides that: “[pJersons other than those
made parties to the original action may be made parties to a
counterclaim or cross-claim in accordance with the provisions of Rules
19 and 20." Because, inter alia, the court made no explicit reference to
its discretionary power to join the counterclaim defendants, Texas
Eastern argues that the court did not properly exercise its discretionary
authority.
(continued. ..)
A-19
In this regard, we note initially that the Supreme Court
has carefully distinguished a non-federal claim asserted by a
plaintiff which can be joined with a federal cause of action
arising from the same transaction despite its destruction of
complete diversity, from ancillary jurisdiction, which
typically involves "claims by a defending party haled into
court against his will, or by another person whose rights
might be irretrievably lost unless he could assert them in an
ongoing action in federal court. " Owen Equipment and
Erection Co. v. Kroger, 437 U.S. 365, 376, 98 S. Ct.
2396, 57 L. Ed. 2d 274 (1978). See also Ambromovage Vv.
United Mine Workers of America, 726 F.2d 972, 989 n.48
(3d Cir. 1984) ("ancillary" jurisdiction pertains to claims
other than those of plaintiff, such as compulsory
counterclaims, while "pendent" jurisdiction pertains to
plaintiff's non-federal claims where there is a federal claim
which gives the court jurisdiction). This subtle distinction
places in doubt Texas Eastern’s broad reading of Finley.
/(.. .continued)
Moreover, Texas Eastern asserts that Rule 13(h) prohibits Texas
Eastern’s counterclaim inasmuch as under the Rule a "‘counter-
claim . . . may not be directed solely against persons who are not
already parties to the original action. . .’". Texas Eastern’s letter
brief, September 8, 1993, at p. 19 (citing Baltimore & Ohio R. Co. v.
Central Ry. Services, Inc., 636 F. Supp. 782, 786 (E.D. Pa. 1986)).
We find Texas Eastern’s argument to be without merit because, as
we indicate in our opinion, we hold that the district court implicitly
found in personam jurisdiction over the excess insurers. Furthermore,
Texas Eastern’s counterclaim was not directed solely against the
counterclaim defendants, but requested the court adjudge that “all of
Texas Eastern’s insurers must bear, jointly and severally, all indemnity,
damages, defense costs... ". Answer and counterclaim of defendant
Texas Eastern, December 15, 1988, at p. 40 (emphasis added).
A-20
We note secondly that Congress has confirmed the
principle of ancillary jurisdiction over counterclaim
defendants in the enactment of the Judicial Improvements
Act of 1990, 28 U.S.C. § 1367 (using new statutory term,
"supplemental jurisdiction").” Section 1367(b) of the Act
restricts the extension of jurisdiction in diversity cases over
"claims by plaintiffs against persons made parties under
Rule 14, 19, 20, or 24," (emphasis added), and by its terms
would not extend to Texas Eastern’s counterclaims as party
defendant. "Supplemental" jurisdiction under the statute
extends to any related claim of the defendant that arises out
of the same case or controversy as the original claim. See
C. Wright, A. Miller, M. Kane, Federal Practice and
Procedure Civil 2d, § 1436 at 11 (Supp. 1993); see, also,
C. Wright, Federal Courts § 79 at 527 n.6 (4th ed. 1983)
("the bringing in of additional parties to respond to a
For the present purposes, § 1367(a) and (b) are of interest and read
as follows:
(a) .. .[I]n any civil action of which the district courts have
original jurisdiction, the district courts shall have supplemental
jurisdiction over all other claims that are so related to claims in the
action within such original jurisdiction that they form part of the
same Case or controversy under Article III of the United States
Constitution. Such supplemental jurisdiction shall include claims
that involve the joinder or intervention of additional parties.
(b) In any civil action of which the district courts have original
jurisdiction founds. solely on section 1332 of this title, the district
courts shall not have supplemental jurisdiction under subsection (a)
over claims by piaintiffs against persons made parties under Rule
14, 19, 20 or 24 of the Federal Rules of Civil Procedure, or over
claims by persons proposed to be joined as plaintiffs under Rule 19
of such rules, or seeking to intervene as plaintiffs under Rule 24 of
such rules, when exercising supplemental jurisdiction over such
claims would be inconsistent with the jurisdictional requirements of
section 1332.
To O_O
A-21
compulsory counterclaim does not destroy diversity
jurisdiction"). Thus, it would appear that the Judiciai
Improvements Act would preserve jurisdiction in the F & C
action.2 We hold that the additional non-diverse
counterclaim defendants do not destroy diversity jurisdiction
in the F & C action because there is complete diversity of
citizenship between the originally named parties.
3
Having found that federal jurisdiction was correctly
found in the F & C case and that all of the insurers are
parties to that action, we note the possibility that the
principle of ancillary jurisdiction might again be invoked to
ground subject matter jurisdiction in the remaining two
cases, AEGIS and Texas Eastern. We need not rely here on
the principle of ancillary jurisdiction, however, because we
find an indepe- dent source of federal subject matter
jurisdiction in both cases.
B. The AEGIS Case
The second of the actions that was before the district
court, Associated Electric & Gas Insurance Services, Lid. v.
Texas Eastern Transmission Corp., No. 88-2126, was filed
by two of Texas Eastern’s excess carriers on March 11,
1988 in the United States District Court for the Eastern
District of Pennsylvania, in which were joined as defendants
Y The Judicial Improvement Act of 1990 became operative on
December 1, 1990, well after the F & C action was filed. We make
reference to the Act merely to evidence the viability of the principles
which have generated the doctrine of ancillary jurisdiction in light of the
doubt cast upon such jurisdiction by Finley. We are satisfied however
that the Judicial Improvement Act codifies the implications of the
Court’s distinctions in Owen Equipment.
A-22
with Texas Eastern all other insurers, including ICI. Based
on the presence of the foreign state, ICI, as a party
"against" which a nonjury civil trial was brought,
jurisdiction in federal court was pursuant to 28 U.S.C.
§§ 1330(a) and 1603.” Texas Eastern argued that the
& The Foreign Sovereign Immunities Act, Pub. L. No. 94-583, 90
Stat. 2892 (Oct. 21, 1976) (FSIA), establishes the jurisdiction of the
federal courts in cases involving foreign sovereigns and the rights of
foreign sovereigns with regard to their non-immune commercial or
private acts to have actions brought against them adjudicated in a federal
bench trial. 28 U.S.C. § 1603 of the FSIA and its jurisdictional
provision, 28 U.S.C. § 1330, provide respectively that,
28 U.S.C. § 1603:
(a) A "Foreign state,” .. . includes a political subdivision of a
foreign state or an agency or instrumentality of a foreign state . . .
(b) An “agency or instrumentality of a foreign state” means any
entity —
(1) which is a separate legal person, corporate or otherwise, and
(2) which is an organ of a foreign state or political subdivision
thereof, or a majority of whose shares or other ownership interest is
owned by a foreign state or political subdivision thereof, and
(3) which is neither a citizen of a State of the United States. . .
nor created under the laws of any third country.
28 U.S.C. § 1330:
The district courts shall have original jurisdiction
without regard to amount in controversy of any
nonjury civil action against a foreign state as
defined in section 1603(a) of this title as to any
claim for relief in personam with respect to which
the foreign state is not entitled to immunity either
(continued. ..)
A-23
defendant insurers in the AEGIS action, most notably ICI,
should be realigned with AEGIS as plaintiffs to reflect their
alleged substantive party designations, making the suit no
longer "against" a foreign state, and thus depriving the
district court of FSIA subject matter jurisdiction. The
district court concluded that the principle of realignment is
inapplicable in matters in which subject matter jurisdiction
is predicated on something other than diversity of
citizenship. The district court found that the AEGIS case
was "ag2inst a foreign state" within the meaning of the
FSIA and exercised its jurisdiction over the matter.
In support of its argument for realignment, Texas
Eastern argues that the primary purpose of the AEGIS action
was to obtain a declaratory judgment that Texas Eastern was
not entitled to coverage under any of the policies issued to it
by the two excess carrier plaintiffs, and that ICI had a
common interest with the excess carriers on that primary
issue against Texas Eastern. Texas Eastern reasons
analogously that, under principles of realignment developed
in the context of the federal diversity jurisdiction statute, the
court was obliged to realign the nominal parties to reflect
their actual adversity of interest on the primary dispute as a
prerequisite to deciding whether a basis for jurisdiction
#(...continued)
under sections 1605-1607 of this title or under any
applicable international agreement.
We uphold the district court’s finding that ICI is a "foreign state” within
the meaning of 28 U.S.C. § 1603(a). The district court has determined
that ICI is “an agency or instrumentality of a foreign state” in that it is a
separate legal person, a majority of its shares are owned by a foreign
state, the Republic of Ireland, and it is neither a citizen of a state of the
United States, nor created under the laws of a third country. These
findings are not clearly erroneous.
A-24
remained under the FSIA. Texas Eastern argues that
because ICI as well as the remaining insurers nominally
designated as defendants should have been realigned with
the two excess carriers who brought suit, the action was not
"against a foreign state," and the jurisdictional authority of
the FSIA was improperly invoked to obtain jurisdiction.”
We disagree.
1.
It is beyond cavil that federal law determines whether
the elements of federal jurisdiction, original or removal,
have been satisfied. Here, of course, we must decide
whether the AEGIS action is "against" ICI, as required
under § 1330. Given this explicit jurisdictional requisite, it
is self-evident that Congress conditioned its conferral of
jurisdiction on the substantive party alignment of any
purported FSIA action. Thus we are obliged to ascertain the
real adversity of interest between AEGIS and ICI in the
AEGIS case and to realign them according to their
substantive interests before recognizing § 1330 jurisdiction.
It is also widely recognized that in enacting the FSIA
and related statutory amendments, Congress sought to create
a new division in addition to federal question and diversity
jurisdiction for federal subject matter jurisdiction. See,
e.g., Ruggiero v. Compania Peruana de Vapores, 639 F.2d
872 (2d Cir. 1981). It is further evident that enactment of
the FSIA was in response to unique policy considerations
touching on the international relations of the United States,
2% Because a number of the excess carriers share common citizenship
with Texas Eastern, diversity jurisdiction was precluded. Thus, if the
principle of realignment had been applied as Texas Eastern advocated,
there would not remain any basis for federal jurisdiction over the AEGIS
action.
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considerations not apropos to the federal diversity statute.
Indeed, the Supreme Court has acknowledged Congress’
deliberate intent to circumvent much of the potential for
interference with the federal government’s foreign relations
caused by lack of uniformity and local bias in civil caselaw
involving foreign states as defendants by channelling private
actions against foreign sovereigns away from the state
forums and into federal courts to be adjudicated in nonjury
trials. Verlinden B.V. v. Central Bank of Nigeria, 461 U.S.
480, 497, 103 S. Ct. 1962, 76 L. Ed. 2d 81 (1983); see
also H. R. Rep. No. 94-1487, 94th Cong., 2d Sess. 13
(1976), reprinted in 1973 U.S.C.C.A.N. 6611-12. Thus,
the FSIA establishes the federal district courts as the forum
preferred by Congress for bringing suit against a foreign
state, and the policy of "jealous restriction" which has
characterized application of the diversity statute is not
operative in the FSIA context. City of Indianapolis v.
Chase National Bank, 314 U.S. 63, 76, 62 S. Ct. 15, 86 L.
_ Ed. 47 (1941) (Congress created diversity jurisdiction with
"jealous restriction"). It is with this in mind that we apply
the principle of realignment to the AEGIS case.
r
The landmark Supreme Court precedent applying the
principle of realignment states,
Diversity jurisdiction cannot be conferred
upon the federal courts by the parties’ own
determination of who are plaintiffs and
who defendants. It is our duty, as it is
that of the lower federal courts, to "look
beyond the pleadings and arrange the
parties according to their sides in the
dispute." Dawson v. Columbia Trust Co..,
197 U.S. 178, 180, [25 S. Ct. 420, 421,
A-26
49 L. Ed. 713 (1905)] . . . . Whether the
necessary "collision of interests," Dawson
v. Columbia Trust Co., supra, at 181 [25
S. Ct. at 421], exists, is therefore not to
be determined by mechanical rules. It
must be ascertained from the "principal
purpose of the suit,” East Tennessee, V. &
G. R. v. Grayson, 119 U.S. 240, 244, [7
S. Ct. 190, 30 L. Ed. 382 (1886)], and the
"primary and controlling matter in
dispute," Merchants’ Cotton Press Co. v.
Insurance Co., 151 U.S. 368, 385 [14
S. Ct. 367, 373, 38 L. Ed. 195 (1894)].
City of Indianapolis v. Chase National Bank, 314 U.S. 63,
69-70, 62 S. Ct. 15, 86 L. Ed. 47 (1941).
This landmark explication presents a two-tiered
methodology for judicial implementation of the federal
diversity statute. The first step obliges the federal court to
isolate the "primary purpose” or "primary and controlling
matter" in a multiple claim suit. The court then directs its
attention exclusively to this "primary" or substantively most
significant claim in order to facilitate ascertainment of
whether the statutory requisites of diversity jurisdiction have
been met. This "primary purpose" test, which ranks issues
according to their substantive importance in the lawsuit,
reflects the approach appropriate to a restrictive and limited
jurisdictional mandate, as in the case of the diversity statute.
It appears, in fact, to be uniquely well suited to the express
language and broad policy objectives of § 1332. We have
indeed adopted this test when determining that jurisdiction is
properly based on diversity of citizenship. See, e.g.,
Employers Insurance of Wausau v. Crown Cork and Seal
Co., Inc., 90S F.2d 42, 46 (3d Cir. 1990) (requiring a "real
dispute on a primary issue in the controversy" for purposes
A-27
of the diversity jurisdiction statute). The "primary purpose"
test, however, appears much less well suited to the purposes
of § 1330, which embodies an effort on the part of
Congress to encourage rather than merely permit litigation
in the federal courts.
The second step involved in implementing the
jurisdictional mandate at issue in the Court’s landmark
diversity realignment case obliges the federal courts to
"look beyond the pleadings and arrange the parties
according to their sides in the dispute. " This step, though
sometimes conflated with the first step in a diversity
analysis and hence commonty identified with diversity
jurisprudence, in fact represents a broader principle of
judicial interpretation of statutes conferring jurisdiction in
federal courts, where the statutory conferral of jurisdiction
is predicated upon the adversarial relationship of the
parties.” In other words, where party designations have
1 Although the “realignment” of parties typically occurs as part of a
federal court’s determination cf diversity of citizenship, the Supreme
Court has “realigned” nominal pari‘es in at least one case where
diversity of citizenship indisputably cicated grounds for original
jurisdiction in the federal district court, and was not challenged.
Chicago, R.I. & P.R. Co. v. Stude, 346 U.S. 574 (1954). In Stude,
state law provided for appeal to a state court from an administrative
condemnation proceeding instituted under state law and resulting in a
damages award to a landowner. The petitioner filed an appeal in state
court, designating the landowner as “plaintiff” and the petitioner as
“defendant,” as was required also by state law. The petitioner
subsequently sought to remove the state court proceeding on the ground
that 28 U.S.C. § 1441, the relevant federal removal statute, authorized
"the defendant or the defendants" to remove civil actions brought in a
state court of which the federal court has original jurisdiction. In the
conicxi « f examining the merits of a motion to remand, the Court
decided that the procedural provisions of the state law were not
controlling for purposes of construing the federal removal statute. Id.,
(continued. ..)
A-28
jurisdictional consequences under the relevant federal
jurisdiction statute, be it § 1332 diversity, § 1330 FSIA or
their related removal provisions, the principle of
"realignment" obliges the court to penetrate the nominal
party alignment and to consider the parties’ actual adversity
of interest for purposes of determining whether there is a
statutory basis for jurisdiction. Thus, despite some
confusion in nomenclature caused perhaps by the
commonplace application of "realignment" in the diversity
context, the principle embodied by the term "realignment"
is one of broader application and is not reducible io the
“primary purpose" test utilized in the diversity context. It
is incumbent upon us in the present appeal to consider
whether a complex FSIA case warrants departure from the
"piamary issue" analysis which we have adopted in the
context of diversity jurisdiction, and application of a more
inclusive realignment analysis.
With this in mind, we note that other circuits have
rejected the "primary purpose” test in favor of the more
lenient "substantial controversy" test to determine § 1330
jurisdiction where multiple claims are pleaded. See, e.g.,
American Motorists Insurance Company v. Trane Company,
657 F.2d 146, 149 (7th Cir. 1981) (substantial controversy
10. .continued) :
346 U.S. at 580. Thus the fact that the case was docketed in state court
with the petitioner as "defendant" was not dispositive for purposes of the
right to remove. The Court "realigned" the parties in conformity with
their substantive adversity of interest, and held that remand was proper.
The Court realigned the parties not to effectuate the limits of diversity
jurisdiction, which would not have been vitiated by realignment, but
rather to enforce the separate limits on removal jurisdiction. Thus, it is ;
clear that the obligation of the federal courts to realign parties to reflect
their true adversity of interest for purposes of deciding the statutory
basis for jurisdiction is not limited to cases purportedly based on
§ 1332.
A-29
applied to diversity action). Under the "substantial
controversy" ranking of issues standard, the court
determines, as precursor to potential realignment, which of
the conflicts asserted in the litigation are merely
"substantial," and thea whether the parties in question are
really opposed according to their true interests in any of
their substantial conflicts. Under this standard, it would not
defeat jurisdiction if there were no statutory basis for
jurisdiction on the primary issue in the litigation, as long as
the statutory elements of jurisdiction were present on any
other "substantial" issue.
In an even more lenient approach than the "substantial
controversy" test, a federal court might recognize a
plaintiff/defendant relationship of adversity if real adversity
exists between the parties on amy issue asserted in the
plaintiff's complaint, regardless of the relative significance
of that issue. Such a liberal approach has not been applied
to diversity cases in any circuit, as well it ought not given
the restrictive language and policy of § 1332. The present
complex FSIA vase, however, being one of first impi< .sion
in our circuit, leads us to examine vhether it is warranted
here. We are guided in this determination by consideration
of the structure and purpose of the FSIA and related
statutes.
m.
In letter and spirit, a liberal approach in implementing
the FSIA’s comprehensive jurisdictional scheme is most
conducive to the FSIA’s paramount objectives of keeping
federal courts open to foreign states, and indeed of
affirmatively encouraging private actions against foreign
states to be adjudicated in federal court. See Verlinden B.V.
y. Central Bank of Nigeria, 461 U.S. 480, 488-89, 103 S.
Ct. 1962, 1968-69, 76 L. Ed. 2d 81 (1983); H.R. Rep. No.
A-30
94-1487, 94th Cong., 2d Sess. 6 (1976), reprinted in 1976
U.S.C.C.A.N. 6611. Unlike the diversity statute, § 1330
grants original jurisdiction in the district court without
regard to the amount in controversy in order to facilitate
this policy. Similarly, § 1441(d) confers an absolute right
of removal on the defendant foreign state. Thus, the
judicial trend to constrict federal diversity jurisdiction does
not inform our application of the principle of realignment
here. We hold that the restrictive "primary issue" test does
not comport with the statutory language or legislative intent
of the FSIA. Because the "substantial controversy" test is
more than adequately satisfied in the AEG/S action, we need
not decide whether only minimal adversity need exist
between the party bringing the action and the foreign state
in order to trigger § 1330 original jurisdiction and
§ 1441(d) removal jurisdiction.
Applying the substantial controversy standard, we note
preliminarily that Texas Eastern itself raises substantial
claims against ICI in all three actions, contravening its
assertion that ICI is an insignificant party. Moreover, in the
AEGIS action, AEGIS has sought the adjudication of its
rights and obiigations inter se with respect to the other
insurers, including ICI. AEGIS sought a declaration of
entitlement to relief by way of contribution or
indemnification from ICI and the other insurers; hence, ICI
was subject to potential liability, which the district court
found to be more than seven million dollars.” ICI was
i’ In the AEGIS complaint AEGIS alleged a dispute between
“plaintiffs and some or all of the Defendant Insurers [as to] whether and
to what extent each is obligated to provide insurance coverage to Texas
Eastern with respect to the Underlying Environmental Matters.” AEGIS
complaint, ¢ 35. In the Ad Damnum Clause, AEGIS demanded a
declaration of “the respective rights and obligations of plaintiffs, each
(continued...)
— 2S
A-31
indeed haled into court by AEGIS against its will and must
be afforded the special protection of the FSIA. Texas
Eastern cross-claimed and counterclaimed in the AEGIS
action asserting joint and several liability among the
insurers, including ICI, and not limited to the excess
insurers as between themselves. Thus, while on the
primary issue in AEGIS there is not a collision of interests
between AEGIS and ICI, there is certainly an element of
adversity between AEGIS and ICI sufficient to satisfy
§ 1330’s requisite that an action brought "against" a foreign
sovereign. Although the district court erroneously reasoned
that realignment was a principle associated exclusively with
1V(_. continued)
Defendant Insurer, the United States, EPA, and Texas Eastern, inter se,
with respect to insurance coverage for the amounts expended or to be
expended by Texas Eastern regarding the Underlying Environmental
Matters.”
1” In response to a question from our panel regarding the adversity of
interest between the syndicates or groups of syndicates of individual
entities and limited partnerships organized under the laws of Great
Britain for the purpose of selling insurance, collectively referred to as
Lloyds, and ICI, which participated in one or more syndicates of
Lloyds, counsel for the insurers responded
There is an issue as to whether [the discharge of PCB from
89 sites along the pipeline over a protracted period of time}
constitutes one occurrence or multiple occurrences. AEGIS is
a first-layer excess insurer in the middle to late "70s. Other
excess insurers sit above it. If there is a finding that there are
multiple occurrences, the loss is spread numerous times over
the primary and low-layer excess insurance companies and
would never come up vertically to the higher layer excess
insurers. However, if there is a finding of a single
occurrence, Texas Eastern has made a claim of $ 750 million
against its insurers [and liability would run vertically}.
Transcript of argument on panel rehearing at p. 39-40.
A-32
diversity jurisdiction, we will affirm the conclusion of the
district court that § 1330 subject matter jurisdiction over the
AEGIS case was proper.
C. The Texas Eastern Case
Texas Eastern Transmission Corp. v. Fidelity &
Casualty, No. 88-5707,” the third action before the
district court, was filed on March 21, 1988, in Harris
County, Texas, against all insurers and removed to the
United States District Court for the Southern District of
Texas by ICI, pursuant to 28 U.S.C. § 1441(d).“ It was
then transferred to the Eastern District of Pennsylvania by
order of the Southern District Court dated July 7, 1988.
Texas Eastern contends that a service of suit clause
appearing in policies subscribed by ICI in favor of Texas
Eastern constitutes a waiver of ICI’s right of removal under
In filing this case Texas Eastern was in substance refiling its earlier
action against all of its insurers brought in New Jersey state court, Texas
Eastern Transmission Corporation v. Fidelity & Casualty Company,
docketed as No. WO-30685-87, and dismissed on March 17, 1988. This
earlier state court action formed the basis for Texas Eastern’s motion to
dismiss or stay the F & C action which was then pending in the
Northern District of Texas.
4 Section 1441(d) provides:
(d) Any civil action brought in a State court against a foreign
state as defined in section 1603(a) of this title may be
removed by the foreign state to the district court of the United
States for the district and division embracing the place where
such action is pending. Upon removal the action shall be
tried by the court without jury. Where removal is based upon
this subsection, the time limitations of section 1446(b) of this
chapter may be enlarged at any time for cause shown.
A-33
28 U.S.C. § 1441(d).” Texas Eastern relies on our prior
holding in Foster v. Chesapeake Ins. Co., Ltd. 933 F.2d
1207 (3d Cir. 1991), in which we reviewed a similar
contractual provision in the context of diversity
jurisdiction.”
Noting that Congress had made clear its intent that
foreign states and instrumentalities of foreign states shall
have the right to have civil litigation decided in federal
court under the FSIA, the district court concluded that a
forum selection clause, by which a defendant foreign state
purports to accede to jurisdiction in either federal or state
court, does not preclude removal to federal court. (Citing
Proyecfin de Venezuela, S.A. v. Banco Industrial de
Venezuela, S.A., 760 F.2d 390 (2d Cir. 1985) (forum
selection clause which places jurisdiction in either federal or
state court is not waiver of foreign sovereign’s § 1441(d)
right to remove)). Assuming for purposes of argument that
1/ ‘The service of suit clause in question provides:
_. . Underwriters hereon, at the request of the Assured, will
submit to the jurisdiction of any Court of competent jurisdiction
within the United States and will comply with all requirements
necessary to give such Court jurisdiction and all matters arising
hereunder shall be determined in accordance with the law and
practice of such Court.
1% The issue of waiver is the only one remaining on rehearing. The
district court dispelled the other issues raised by Texas Eastern,
including its assertion that because ICI’s interest in the case is allegedly
de minimis, it should have been precluded from removing the case to
federal court. The district court held that ICI clearly has a potential
liability as an excess insurer of at least several million dollars, and even
if its monetary interest in the case were de minimis, it retained the
express right to remove the case to federal court under § 1441(d). The
district court also found that ICI had timely removed the case to federal
court.
A-34
the right to remove could be contractually waived, the
district court held that, at the very least, such a waiver must
be express and unambiguous in the context of the FSIA.
Not finding this, the district court denied the motion of
Texas Eastern to remand the action to the state court of
Texas.
In examining the nature of the service of suit clause in
question and its efficacy in depriving ICI of its § 1441(d)
right to remove in Texas Eastern, we are again obliged to
take cognizance of the policy imperatives of the FSIA. We
find those imperatives absent in Foster, the case upon which
Texas Eastern relies. It is true that in Foster we construed
a forum selection clause in a reinsurance agreement as a
waiver of the reinsurer’s right to remove. But in Foster, a
diversity of citizenship breach of contract case, we also
explicitly noted that the FSIA poses unique considerations
that might warrant a different conclusion. 933 F.2d at
1217-18 n.15. In an extensive footnote, we contrasted the
diversity context of Foster with the FSIA removal context of
In re Delta American Re Ins. Co., 900 F.2d 890 (6th Cir.),
cert. denied, 498 U.S. 890 (1990), which held that
contractual waiver of the § 1441(d) right to remove, if it is
to be recognized, must be clear and unequivocal. Jd. at
894. Although waiver of a § 1441(d) right of removal was
not an issue in Foster, we acknowledged In re Delta’s
reliance on the peculiar purposes of the FSIA, which are
best served by a uniform body of law developed in federal
court, and the purpose of § 1441(d) in particular, which is
to give the defendant foreign state the unqualified right to
remove any civil action brought against it in state court.
See also Teledyne, Inc. v. Kone Corp., 892 F.2d 1404,
1409 (9th Cir. 1989) (generally applicable rules of removal
do not apply to the uniquely expansive § 1441(d)).
“hot
cap.
bam
A-35
We concur with our sister circuits which give an
expansive interpretation of the nature of the right to remove
under § 1441(d). Given Congress’ unusually strong pre-
ference for adjudication of claims against foreign states in
the federal court system, we hold that it would contravene
strong public policy to permit a less than absolutely une-
quivocal contractual provision to divest a federal district
court of FSIA subject matter jurisdiction. While the FSIA
does not confer exclusive jurisdiction in the federal courts
and does not explicitly limit a foreign state’s ability to
waive its right to remove, the district court’s power to
remand based on breach of a contractual forum selection
Clause is doubtful where, as here, the clause may be
construed as nothing more than a waiver of the right to
contest in personam jurisdiction. See Proyecifin, 760 F.2d
at 397. Thus, our holding in Foster is inapplicable in the |
FSIA context. A remand in this case would be unrea- |
sonable, and hence the purported contractual waiver is not )
enforceable. M/S Bremen v. Zapata Off-Shore Co., 407
U.S. 1, 15, 92 S. Ct. 1907, 32 L. Ed. 2d 513 (1972) .
(forum selection clause is binding unless enforcement is :
unreasonable, unfair or unjust).
Moreover, we note that ICI was not a "foreign state"
within the meaning of FSIA at the time ICI subscribed the
policies at issue. Thus, ICI at the time it entered into the
contracts did not have an absolute right of removal under
§ 1441(d) to waive, and did not conduct its contract
negotiations with the effect of the forum selection clause on
a § 1441(d) right of removal in mind. The purp »rted
waiver was negotiated strictly between private parties. The
foreign sovereign was not a party to the original contract
and did not negotiate the original terms. Inasmuch as
ordinary principles of contract interpretation apply here, the
fact that the forum selection clause was not the subject of
negotiations between Texas Eastern and the foreign state
A-36
militates against a finding of waiver. Under these
circumstances, the service of suit clause does not abrogate
ICI’s absolute right to remove under § 1441(d). The
structure and purpose of the FSIA, as well as ordinary
principles of contract interpretation, support the district
court’s exercise of subject matter jurisdiction and its denial
of Texas Eastern’s motion for remand.
Il.
We will affirm the district court’s exercise of
jurisdiction in each of the three consolidated actions that are
the subject of this opinion. The substantive questions
presented in these three cases were decided as to all parties
in the opinion of the district court granting summary
judgment against Texas Eastern, dated July 9, 1992, which
we will affirm in a separate opinion filed
contemporaneously with this one.
In sum, in our companion opinion which will be filed
today, we affirm the judgment of the district court as to
Texas Eastern’s liability in all three cases. The Fidelity &
Casualty Co. of New York v. The Texas Eastern
Transmission Corp., 15 F.3d 1249 (3d Cir. 1994). For the
sake of completeness and for the purpose of appropriate
cross reference, we reiterate the affirmance of that judgment
here. After rehearing, we hold that the judgments of the
district court as to subject matter or personal jurisdiction in
Associated Electric & Gas Insurance Services, Ltd. v. Texas
Eastern Transmission Corp. et al., The Fidelity & Casualty
Co. of New York v. Texas Eastern Transmission Corp. and
Texas Eastern Transmission Corporation v. Fidelity and
Casualty Company of New York et al. will be affirmed in all
respects.
A-37
ALITO, Circuit Judge, dissenting: (Dissent #1 of 2)
This case was originally decided by an unpublished
opinion filed in May 1993. For two reasons, I dissented in
part. First, I believed that the district court, ruling prior to
our decisions in Foster v. Chesapeake Insurance Co. , 933
F.2d 1207 (3d Cir.), cert. denied, 112 S. Ct. 302, 116 L.
Ed. 2d 245 (1991), and Employers Insurance of Wausau v.
Crown Cork & Seal Co., 942 F.2d %62 (3d Cir. 1991), had
erroneously rejected TETCO’s argument that subject matter
jurisdiction was lacking in two of the three civil actions that
were before the court — the Texas Eastern and AEGIS
actions. Second, I believed that the district court’s grant of
summary judgment in favor of F & C in the third action —
the F & C action — should be reversed in part. (My views
on this latter issue are set out in my partial dissent from the
other opinion that the panel majority has filed in this Case).
On June 11, 1993, TETCO filed a petition for
rehearing and a suggestion for rehearing in banc,
contending that the district court lacked jurisdiction in the
Texas Eastern and AEGIS cases. On August 18, 1993, an
order granting panel rehearing was issued. After receiving
supplementary briefing on the jurisdictional questions and
after reargument, the panel majority has reached precisely
the same conclusion as it did before, albeit in some respects
for different reasons. I remain in disagreement with the
majority on these jurisdictional questions, and I therefore
respectfully dissent.
As noted, three civil actions were before the district
court. The first case, the F & C action, was Originally filed
in the United States District Court for the Northern District
of Texas, with federal jurisdiction predicated on diversity of
citizenship. This is the only one of the three actions in
which I think federal jurisdiction was present. The second
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case, the Texas Eastern case, was filed in state court in
Texas and subsequently removed (improperly, in my view)
to the United States District Couri for the Southern District
of Texas. The third case, the AEGIS case, was filed in the
United States District Court for the Eastern District of
Pennsylvania, with federal jurisdiction based (wrongly, I
believe) on 28 U.S.C. § 1330(a). Presumably because of
the pendency of the AEGIS case in the Eastern District of
Pennsylvania, the Judicial Panel on Multidistrict Litigation
transferred the other two actions to that district and
consolidated all three cases for purposes of pretrial
proceedings. In Septemfer 1988, the district court rejected
TETCO’s challenges to the existence of federal jurisdiction
in the Texas Eastern and AEGIS cases. Several years later,
in a single order bearing the multi-district litigation docket
number assigned to the consolidated cases, the district court
granted summary judgment against TETCO, and the current
appeal followed. It was by this route — based from the
Start On erroneous jurisdictional premises — that these cases
involving difficult, unsettled, and controversial questions of
Texas insurance law, found their way to our court.
I will discuss, in turn, the jurisdictional questions
presented in each of the three actions that were before the
district court, but I will do so in the opposite order from
that used by the majority. I have chosen this order, not for
sheer contrariness, but because my discussion of the F & C
action can best be understood after I have addressed the
other two cases.
I.
The Jexas Eastern Case.
As I have noted, TETCO, preferring to litigate in the
Texas state courts, originally filed this action in Harris
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County, Texas, against its primary carrier, F & C, and its
many €Xcess carriers, including the Insurance Company of
Ireland ("ICI"). ICI was a private entity when it entered
into its insurance contract with TETCO, but "[w]hen
financial difficulties threatened in 1985, the Irish
government moved to preserve the company. Sealuchais
Arachais Teoranta, a holding company created by the Irish
Parliament and controlled by the Irish Minister for Industry ,
Trade, Commerce, and Tourism, acquired all of ICI’s
shares. With financial Stability, its shares are to revert to
the original shareholders." Mobil Corp. v. Abeille General
Insurance Cc., 984 F.2d 664, 665 (Sth Cir. 1993).
Contending that these developments made it a "foreign
state" within the meaning of 28 U.S.C. § 1603,./ ICI then
removed this entire action to the United States District
Court for the Southern District of Texas.
Assuming that ICI falls within 28 U.S.C. § 1603’s
definition of a "foreign state," I nevertheless believe that
this removal was improper and that federal jurisdiction was
lacking because the insurance contract between TETCO and
ICI contained a clause featuring language that our court has
already construed as a waiver of the right to remove. The
clause in the TETCO-ICI contract stated that if ICI failed to
VY ‘Under 28 U.S.C. § 1603(a) and (b), the term "foreign state"
includes any entity
(1) which is a separate legal person, corporate or otherwise, and
(2) which is an organ of a foreign state or political subdivision
thereof, or a majority of whose shares or other ownership interest is
owned by a foreign state or political subdivision thereof, and
(3) which is neither a citizen of a State of the United States as
defined in section 1332(c) and (d) of this title, nor created under the
laws of any third country.
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pay any TETCO claim, ICI would, "at the request of the
Insured," "submit to the jurisdiction of any court of
competent jurisdiction within the United States" and would
"comply with all requirements necessary to give such Court
jurisdiction." In Foster v. Chesapeake Insurance Co..,
supra, one insurance company, Chesapeake, agreed (o a
virtually identical clause in a contract with another
insurance company, Mutual Fire. When the rehabilitator
appointed to marshal Mutual Fire’s assets later sued
Chesapeake in state court, Chesapeake removed the action
based on diversity of citizenship. Holding that Chesapeake
had waived its right to remove, we wrote as follows:
[B]y consenting to "submit" to “any court"
of competent jurisdiction "at the request of
the Company," and to comply with all
requirements necessary to give "such
court" jurisdiction, Chesapeake agreed to
go to, and stay in, the forum chosen by
Mutual Fire.
Foster, 933 F.2d at 1216-17 (emphasis in original). In light
of this holding, the virtually identical clause in the
TETCO-ICI contract must be construed! in the same way.
Although the majority tries to distinguish Foster on the
ground that Foster involved removal based on diversity,
rather than the Foreign Sovereign Immunities Act (FSIA), I
find that effort unconvincing. The majority states:
Given Congress’ unusually strong
preference for adjudication of claims
against foreign states in the federal court
system, we hold that it would contravene
strong public policy to permit a less than
absolutely unequivocal contractual
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provision to divest a federal district court
of FSIA subject matter jurisdiction.
Maj. Op. #1, at 1243 (emphasis added). This argument
seems to fly in the face of Foster. Immediately after noting
that Jn Re: Delta Insurance Co. , 900 F.2d 890 (6th Cir.),
cert. denied, 498 U.S. 890 (1990), had held that a waiver
of the right to remove under the FSIA must be clear and
unequivocal, the Foster panel wrote:
[W]e do not see why contractual waivers of
the right to remove must be clear and
unequivocal... .
We think the "clear and convincing"
Standard so stringent as to be contrary to
the right of parties to contract in advance
regarding where they will litigate. A court
simply should determine contractual
waiver of the right to remove using the
same benchmarks of construction and, if
applicable, interpretation as it employs in
resolving all preliminary contractual
questions. Indeed, inasmuch as the
determination of whether there is a waiver
of the right of removal to be derived from
a forum selection clause will at least in
some cases, such as here, be a matter of
construction and thus of law, it seems
anomalous to speak of a "clear and
unequivocal" standard for we simply make
plenary determinations of legal issues.
933 F.2d at 1218 n.15 (emphasis added). I do not believe
that the majority’s decision in this case can be reconciled
with this passage.
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Moreover, even if such reconciliation were possible, I
would find the :..ajority’s position unacceptable, for I cannot
understand why "foreign states," when they choose to enter
into contracts, should have the benefit of especially
favorable rules of contract construction or interpretation.
Are "foreign states" unable to afford competent lawyers to
draft and review their contracts and thereby insure that the
removal rights conferred by 28 U.S.C. § 1441(d) are not
inadvertently compromised?
In any event, even if it were appropriate to apply such
a rule to contracts signed by a foreign state, it simply makes
no sense to apply that rule to the TETCO-ICI contract,
since ICI was not a "foreign state" when that contract was
formed. When TETCO entered into its agreement with ICI,
it contracted for (and presumably paid for) ICI’s agreement
not to exercise any of the rights it then possessed to resist
the jurisdiction of any court of competent jurisdiction in the
United States. I do not think that TETCO should lose the
benefit of this bargain simply because the Irish government
chose to acquire ICI’s assets. Nor do I think that TETCO
should be penalized for failing to secure from ICI an
agreement specifically stating that, if ICI should
subsequently become a "foreign state," it would not exercise
the special removal rights that such states possess. We can
properly demand that parties exercise prudent foresight; we
cannot require clairvoyance.
Il.
The AEGIS Action.
Two of TETCO’s excess insurers, Associated Electric
& Gas Insurance Services, Ltd. (AEGIS) and National
Surety Corp. (NS), filed this action in the United States
District Court for the Eastern District of Pennsylvania
or. we
Peta 5 Oe NRO UNS E39 Sh
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against TETCO, F & C, and TETCO’s other excess
carriers, including ICI. Relying on ICI’s status as a
defendant, the complaint alleged that jurisdiction was
present based on 28 U.S.C. § 1330(a), which confers
jurisdiction over a "civil action against a foreign state."
In its initial brief on appeal, TETCO argued that this
action was not in reality against a foreign state. TETCO
contended that the "primary issue” test adopted in
Employers Insurance of Wausau v. Crown Cork & Seal Co.,
supra, should be applied, that the realignment of the parties
was therefore required, and that ICI should be realigned as
a plaintiff. After such realignment, TETCO argued,
jurisdiction under 28 U.S.C. § 1330(a) would be lacking
because the action would not be one "against a foreign
state." TETCO Br. at 67-68 (emphasis added).
In response, the carriers did not argue that the
"substantial conflict" test or any other lesser standard should
be applied to determine whether ICI’s interests were adverse
to those of the other carriers. Nor did the carriers even hint
that there was any real conflict between ICI ani the other
carriers. Instead, the carriers contended that "jrjealignment
to test subject matter jurisdiction is not appropriate where
jurisdiction is based on the FSIA. Rather, it is an antidote
to artificial maneuvers by parties to create diversity
jurisdiction." Appellees’ Joint Br. at 66. Alternatively, the
carriers argued that, if the parties were realigned, one of the
following two realignments should be chosen: "TETCO as
plainti* and the Carriers as defendants" or "all Carriers
plainti.fs and TETCO a defendant.” Jd. at 66, 67.
Tellingly, both of these realignments place all of the
carriers, including ICI, on the same side.
In its initial unpublished opinion, the panel majority
agreed with the carriers that realignment need not be
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considered. The panel described realignment as "a creature
of diversity jurisprudence" and concluded that "application
of realignment to Immunities Act jurisdiction would not
serve any purpose." Op. at 7. Now, however, the majority
States:
[I]t is self-evident that Congress
conditioned its conferral of jurisdiction on
the substantive party alignment of any
purported FS/A action. Thus we are
obliged to ascertain the real adversity of
interest between AEGIS and ICI in the
AEGIS case and to realign them according
to their substantive interests before
recognizing section 1330 jurisdiction.
Maj. Op. #1, at 1239. Nevertheless, the majority again
reaches the conclusion that the district court had jurisdiction
over the AEGIS action under 28 U.S.C. § 1330(a). The
majority reasons that this provision requires a lesser degree
of adversity than is needed in diversity cases. Rejecting the
"primary issue” test that our court has adopted in diversity
cases, the majority holds that no more than a "substantial
conflict” is necessary and finds that that test is satisfied
here. The majority bases this conclusion on (1) the fact that
the AEGIS complaint sought, among other things, a
declaration of the plaintiffs’ rights with respect to the
carriers named as defendants, including ICI, and (2) a
statement made by the carriers’ counsel at oral argument.
Maj. Op. #1, at 1241-1242. I disagree with this approach.
First, I question whether we should abandon the
"primary issue" test simply because federal jurisdiction is
invoked under 28 U.S.C § 1330(a) rather than 28 U.S.C.
§ 1332(a)(1). Particularly if the “substantial conflict" test
can be satisfied with the type of showing that the majority
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finds sufficient, I fear that that test may permit the
unwarranted evasion of federal jurisdictional requirements.
Second, even if the "substantial conflict" test is to be
applied, I am not willing to hold that a "substantial conflict"
exists in this case based on the facts that the majority cites.
Surely, a "substantial conflict" cannot be found solely
because that the complaint requests a declaration of
AEGIS’s and NS’s rights with respect to ICI. Nor do I
- think that we should base our decision solely on the remarks
of the carriers’ attorney at oral argument. I certainly
recognize, as the carriers’ attorney pointed out, that the
interests of the primary carrier, F & C, might under some
circumstances become adverse to those of the excess
carriers and that the interests of excess carriers at
“different levels" might become adverse. The critical
question here, however, is whether there was in fact at least
a “substantial conflict" between, on the one hand, two
particular excess carriers (AEGIS and NS) and, on the other
hand, another particular excess carrier (ICI). This question
cannot be decided without analyzing the actual terms of the
relevant insurance contracts. The parties have never
provided us with any such analysis, and I do not think that
we should attempt to perform such analysis on our own at
the panel rehearing stage. Therefore, at the very least, 1
think that a remand to the district court is needed so that an
appropriate analysis can be undertaken and so that the
disposition of this question can be based on facts rather than
supposition.
Il.
The F & C Action.
This action was filed by F & C in the United States
District Court for the Northern District of Texas against
TETCO, with jurisdiction based on diversity of citizenship.
A-46
There is no question that the district court had jurisdiction
witb respect to this action, but it is now hotly disputed
whether the excess insurance carriers were or could
properly be made parties to this action. F & C did not
name the excess insurers as parties — and F & C could not
have named many of them without destroying federal
jurisdiction, since they share common citizenship with
TETCO. As noted, however, the excess carriers were
named as parties in the Texas Eastern and AEGIS actions.
After those cases had been consolidated with the F & C
action and after TETCO’s jurisdictional challenges in the
Texas Eastern and AEGIS actions had been rejc ied,
TETCO filed counterclaims against the excess insurers in
the F & C case, but TETCO never served the excess
Carriers with summonses, and many of them asserted the
absence of personal jurisdiction as a defense. For the most
part, however, it appears that the parties and the district
court paid little if any attention to the question whether the
excess imsurers were parties in the F & C case as opposed
to the other two consolidated cases.
It was not until TETCO petitioned for rehearing that the
parties paid any significant attention to the question whether
the excess insurers had been made parties in the F & C
case. Then, after panel rehearing was granted, both sides
advanced precisely the opposite of the arguments that one
would have expected them to make when the counterclaims
were filed. TETCO offered a long list of reasons why its
own counterclaims were defective: the counterclaims were
never served, and the excess insurers did not waive their
objections to personal jurisdiction; the counterclaims were
improper under Fed. R. Civ. P. 13(h) and, in any event,
the district court never decided whether, in the exercise of
its discretion, it would permit the excess insurers to be
joined under that provision; and finally, since there was no
independent federal jurisdictional basis for TETCO’s
A-47
counterclaims against the excess insurers, the district court
could not, under Finley v. United States, 490 U.S. 545
(1989), exercise jurisdiction over them. The carriers
responded with an equally lengthy list of reasons why the
excess insurers had properly been made parties. Agreeing
with the carriers, the majority rejects all of TETCO’s
arguments. Among other things, the majority finds that the
excess insurers waived their objections to personal
jurisdiction by litigating in the district court, and the
majority adopts a narrow (and, to my mind, questionable)
interpretation of Finley.
| think it is inadvisable for the panel to delve into these
questions at this juncture. For example, I would not, at the
rehearing stage, decide whether the excess insurers
participated in the F & C case (as opposed to the other two
cases) so as to be deemed to have waived their objections to
personal jurisdiction; this is a fact-bound question never
addressed by the district court. Nor would I rush to decide
whether, despite Finley, the district court could exercise
subject matter jurisdiction over the counterclaims.
Beginning in September 1988, when the district court
rejected TETCO’s jurisdictional challenges to the Texas
Eastern and AEGIS actions, the proceedings in the three
consolidated cases went forward on the premise that the
court had jurisdiction in all three actions. Hence, when the
district court granted summary judgment against TETCO, it
issued a single order bearing the multi-district litigation
docket number assigned to all three consolidated cases.
Since I believe that the district court lacked jurisdiction in
two of those actions, I would vacate that order and remand
the F & C case to the district court. The district court
could then, in the first instance, rule on whatever arguments
the parties chose to pursue. If necessary, the district court
could also, in the first instance, decide the fact-bound
A-48
question whether the excess insurers waived any objections
to personal jurisdiction in the F & C case as a result of
participating in it. Until the district court has ruled,
however, I do not think that our court should consider the
long list of questions — some highly artificial, some
fact-bound, and some legally difficult — that the parties
advanced with respect to these counterclaims after panel
rehearing was granted.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
A-49
Filed January 10, 1994
OPINION 2 OF 2
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 92-1638
IN RE: TEXAS EASTERN TRANSMISSION CORP. PCB
CONTAMINATION INSURANCE COVERAGE LITIGATION
(MDL No. 764)
THE FIDELITY & CASUALTY CO. OF NEW YORK
v.
THE TEXAS EASTERN TRANSMISSION CORP.
(D.C. Civil No. 88-05039]
ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES,
LTD.; NATIONAL SURETY CORPORATION
¥.
TEXAS EASTERN TRANSMISSION CORPORATION;
F.DELITY & CASUALTY INSURANCE COMPANY OF NEW
YORK; CERTAIN UNDERWRITERS AT LLOYDS
OF LONDON, INCLUDING THE INSURANCE COMPANY OF
IRELAND; AETNA CASUALTY AND SURETY COMPANY;
AMERICAN HOME ASSURANCE COMPANY; BOSTON OLD
COLONY INSURANCE COMPANY; CONTINENTAL
CASUALTY INSURANCE COMPANY; FIRST STATE
INSURANCE COMPANY; HIGHLANDS INSURANCE
COMPANY; THE HOME INSURANCE COMPANY;
INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF THE STATE OF
PENNSYLVANIA; INTERNATIONAL INSURANCE COMPANY;
LEXINGTON INSURANCE COMPANY; MIDLAND
INSURANCE COMPANY; MUTUAL MARINE INSURANCE
A-50
COMPANY; PRUDENTIAL REINSURANCE COMPANY;
RANGER INSURANCE COMPANY; REPUBLIC INSURANCE
COMPANY; STONEWALL INSURANCE COMPANY;
PENNSYLVANIA INSURANCE GUARANTY ASSOCIATION;
UNITED STATES OF AMERICA; UNITED STATES
ENVIRONMENTAL PROTECTION AGENCY
(D.C. Civil Ne. 88-02126)
TEXAS EASTERN TRANSMISSION CORPORATION
v.
FIDELITY AND CASUALTY COMPANY OF NEW YORK;
ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES,
LTD.; AETNA CASUALTY AND SURETY COMPANY;
AMERICAN HOME ASSURANCE COMPANY, a/k/a
AMERICAN HOME INSURANCE COMPANY; BOSTON OLD
COLONY INSURANCE COMPANY; CIGNA INSURANCE
COMPANY; CONTINENTAL CASUALTY COMPANY;
EMPLOYERS MUTUAL CASUALTY COMPANY; FIRST
STATE INSURANCE COMPANY; HIGHLANDS INSURANCE
COMPANY; THE HOME INSURANCE COMPANY; THE
INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF THE STATE OF
PENNSYLVANIA; INTERNATIONAL INSURANCE COMPANY;
LEXINGTON INSURANCE COMPANY; MIDLAND
INSURANCE COMPANY; NATIONAL SURETY
CORPORATION; PRUDENTIAL REINSURANCE COMPANY;
RANGER INSURANCE COMPANY; REPUBLIC INSURANCE
COMPANY; STONEWALL INSURANCE COMPANY; UNITED
STATES FIRE INSURANCE COMPANY; CERTAIN
UNDERWRITERS AT LLOYD’S, LONDON and CERTAIN
LONDON MARKET INSURANCE COMPANIES
(D.C. Civil No. 88-05707)
Texas Eastern Transmission Corporation,
Appellant
A-51
Appeal from the United States District Court
for the Eastern District of Pennsylvania
Argued
April 7, 1993
OPINION OF THE COURT
MANSMANN, Circuit Judge.
Preliminary Note
Three cases filed in three courts were consolidated for
trial in the district court from whose combined judgments
these appeals have been taken at No. 92-1638. This opinion
addresses only one facet of these cases — the liability of
Texas Eastern Transmission Corp. as adjudicated by the
district court in Fidelity & Casualty Co. of New York v.
The Texas Eastern Transmission Corp., (hereinafter the
"F & C" action) originally filed in the Northern District of
Texas, Texas Eastern Transmission Corp. v. Fidelity and
Casualty Co. of New York et al., (hereinafter the "Texas
Eastern" action) originally filed in a Texas state court and
later removed to the Southern District of Texas, and
Associated Electric & Gas Insurance Services, Ltd. et al. v.
Texas Eastern Transmissie~ Corp et al. (hereinafter the
"AEGIS" action) filed in the Liastern District of
Pennsylvania. All three cases were later assigned by the
Multi-District Litigation Panel to the district court below.
On April 7, 1993, we heard argument on the appeal of
Texas Eastern Transmission Company from the judgment of
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the district court, in a multi-district litigation, declaring that
‘fexas Eastern’s insurance carriers (the "Carriers") were not
liable for damages arising out of Texas Eastern’s discharge
of PCB-laden oils into the environment. Our unreported
opinion, affirming the district court’s judgment, was filed
on May 28, 1993. We vacated that opinion on January 6,
1994. This opinion in effect reinstates the discussion on lia-
bility set forth in our previous not-for-publication opinion.
We deem it necessary to write separate opinions
because Texas Eastern Transmission Corp. petitioned for
rehearing in only two of the cases — Texas Eastern and
AEGIS — and only on the subject matter jurisdiction issue.
We ordered panel rehearing in those two cases only, stayed
our mandate in all three cases and ordered oral re-argument
of the question of subject matter jurisdiction in the two
cases. Our companion opinion discusses subject matter
jurisdiction in the cases that were reheard and also the
question of jurisdiction in F & C because jurisdiction in that
case was indirectly put to question in the rehearing
arguments. This opinion addresses once again the subject of
Texas Eastern’s liability in all three cases.
Texas Eastern Transmission Corporation claimed that
its comprehensive general liability insurance carriers (the
"Carriers") must pay for damages associated with the cost
of removing PCBs that present a danger of polluting the
property of third parties. The district court granted |
summary judgment against Texas Eastern on the theory that
Texas Eastern provided prejudicially late notice of its claim
to the Carriers. We will affirm in the case of Fidelity
Casualty Co. of New York v. Texas Eastern Transmission
Co., D.C. Civ. No. 88-05039 (E.D. Pa.).
I.
The relevant facts, which appear in great detail in the
district court’s opinion, may be summarized as follows.
Until the early 1970s, Texas Eastern used a toxic,
PCB-laden lubricant in compressor stations along a pipeline
that stretched 9,500 miles, from Texas to New York. The
lubricant co-mingled with other toxic fluids in the pipeline,
and Texas Eastern discharged those fluids into the
environment, either by venting them into the air during
start-up or shut-down, or by discharging them into earthen
pits, which occasionally overflowed. Texas Eastern would
also occasionally spray fluids from the pits to kill weeds or
to control dust.
As early as 1972, the lubricant’s manufacturer informed
Texas Eastern that the lubricant contained toxic PCBs.
Throughout the late 1970s and early 1980s, Texas Eastern
became increasingly aware that PCBs were entering the
environment via the pipeline fluid. The district court
determined that, taking all inferences in favor of Texas
Eastern, a genuine issue of material fact existed as to
whether Texas Eastern knew between 1970 and December
1986 that PCBs were present in the pipeline fluid and that
the PCBs could migrate, via the pipeline fluid, onto the
property of third parties. That issue was critical because
such knowledge would trigger Texas Eastern’s obligation to
notify Carriers of an insurable "occurrence" under the
relevant insurance policies.
Employing the correct summary judgment standard, the
district court determined that although a rational factfinder
could conclude that Texas Eastern knew PCBs were
migrating to the property of third parties as early as 1972,
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December of 1986 was the latest possible date a jury could
conclude that Texas Eastern discovered that PCBs were
migrating onto the property of third parties. The district
court based its determination in part on Texas Eastern’s
concession that in December, 1986, a preliminary report
commissioned by Texas Eastern gave it reason to know that
PCBs were migrating off-site.
As we review in more detail below, between
December, 1986, and August, 1987, Texas Eastern entered
into at least one consent decree and negotiated in earnest
with the Environmental Protection Agency. After some
months of negotiation with EPA, Texas Eastern notified the
Carriers of a potential occurrence giving rise to a claim.
The cost of clean-up is now estimated at $750 million.
Fidelity and Casualty, Texas Eastern’s primary carrier,
brought its case in the Northern District of Texas premised
on diversity jurisdiction, seeking a declaratory judgment
that it was not liable under its policy for the claims.
Associated Electric & Gas Insurance Services, Ltd.
("AEGIS") and National Surety Corporation, other carriers
of Texas Eastern, brought a second suit against Texas
Eastern and all of the remaining carriers in the Eastern
District of Pennsylvania. Federal subject matter jurisdiction
in the AEGIS action was premised on the Foreign Sovereign
Immunities Act. Texas Eastern brought a third state-court
action against all the carriers, later removed to the Southern
District of Texas also on the basis of the Immunities Act.
Because we address whether Immunities Act jurisdiction
was proper in a separate opinion, that issue will not be
discussed here.
In an extensive opinion, the district court determined
that summary judgment should be entered against Texas
Eastern on the ground that its delay in providing notice to
A-55
the Carriers was unreasonable and prejudicial as a matter of
law. In re Texas Eastern Transmission Corporation PCB
Contamination Insurance Coverage Litigation, No.
MDL-764 (E.D. Pa. July 9, 1992).
We exercise plenary review of the district court’s grant
of summary judgment, applying "the same test the district
court should have used initially." Goodman v. Mead
Johnson & Co., 534 F.2d 566, 573 (3d Cir. 1976), cert.
denied, 429 U.S. 1038 (1977). See generally Celotex Corp.
v. Catrett, 477 U.S. 317 (1986); Anderson v. Liberty
Lobby, Inc., 477 U.S. 242 (1986); Matsushita Electric
Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986).
The district court clearly had diversity jurisdiction over
one of the three cases that constitute this multi-district
litigation. Fidelity & Cas. Co. v. Texas Eastern. The other
two cases, Associated Electric & Gas Ms. Svs. v. Texas
Eastern, No. 88-021267 ("AEGIS") and Texas Eastern v.
Fidelity & Cas. Co., No. 88-05707, are premised on
jurisdiction under the Foreign Sovereign Immunities Act,
and they are the subject of an opinion filed contem-
poraneously with this one. We have jurisdiction of a final
decision of the district court. 28 U.S.C. § 1291.
U.
In determining that late notice relieved the Carriers”
of any obligation under the contracts, the district court
reached three central conclusions. First, Texas Eastern’s
Y Although we decide here only the diversity case involving Fidelity
and Casualty, D.C. Civ. No. 88-05039, the Carriers submitted a joint
brief, and so we refer to Fidelity & Casualty’s position generically as
the Carriers’ position.
A-56
duty to inform the carriers of an "occurrence" accrued not
later than December of 1986. Second, Texas Eastern
provided unreasonably late notice to the Carriers eight or
nine months later, in August of 1987. Third, the
unreasonably late notice prejudiced the Carriers. Although
Texas Eastern challenges all three conclusions, only the
third, regarding prejudice, merits some discussion.
A.
“To predict the standard of prejudice applied under
Texas law, we must first review the relevant line of Texas
cases. The Texas Supreme Court long adhered to the rule
that an insured’s delay in providing notice relieved a carrier
of liability under the policy, even in the harsh case when
the carrier stipulated that it had not suffered any prejudice
at all. See Members Mutual Ins. Co. v. Cutaia, 476
S.W.2d 278 (Tex. 1972) (stating harsh rule).
In 1973, the Texas State Board of Insurance ordered
that the following Amendatory Endorsement be attached to
general liability policies:
As respects bodily injury liability coverage
and property damage liability coverage,
unless the company is prejudiced by the
insured’s failure to comply with the
requirement, any provision of this policy
requiring the insured to give notice of
action, occurrence or loss, or requiring the
insured to forward demands, notices,
summons or other legal process, shall not
bar liability under this policy.
See R. at 869-72 (Order of Insurance Board).
ge he he
A-57
Although "there is a paucity of authority explicating
what, within the purview of the endorsement, would
constitute prejudice sufficient to relieve an insurer of
liability," Kimble v. Aetna Casualty & Surety Co., 767
S.W.2d 846, 850 (Tex. Ct. App. 1989), at least one Texas
appellate court has stated clearly that prejudice results to the
insurer by "the change in its position” brought about by an
insured’s failure to notify. Members Ins. Co. v. Branscum,
803 S.W.2d 462, 466 (Tex. Ct. App. 1991) (emphasis
added) (citing Kimble, 767 S.W.2d at 851). Our task,
therefore, is to determine what constitutes prejudice under
Texas law.
While we find helpful the change-in-position elaboration
on the legal meaning of prejudice, the question remains how
substantial that change in position must be before a court
can conclude that, as a matter of law, a carrier has suffered
prejudice. In some states, for example, courts have
imposed a "substantial prejudice" standard, which requires a
demonstration that an insurer could have either defeated a
claim or settled for a smaller sum than the sum for which
the insured ultimately settled. Insurance Co. of Pa. v.
Associated Int’l Ins. Co., 922 F.2d 516, 524 (9th “ir. 1990)
(applying California law). To determine the extent of harm
sufficient to constitute prejudice under Texas law, we find
instructive the facts of several Texas cases.
In a number of cases, Texas courts have held that
notice to a carrier after the entry of a default judgment has
become final constitutes prejudice, as a matter of law,
sufficient to defeat the carrier’s liability under a policy.
See, e.g., Ratcliff v. National County Mut. Fire Ins. Co.,
735 S.W.2d 955, 957 (Tex. Ct. App. 1987). Compare
Allstate Ins. Co. v. Pare, 688 S.W.2d 680 (Tex. Ct. App.
1984) (no prejudice where insurer received papers before
default and had negotiated for settlement prior to default).
A-58
Notably, the court in Ratcliff did not require the carrier to
show that it would have or could have defended the suit
successfully or reached a better settlement. We note also
that in Kimble the court determined that prejudice existed
notwithstanding that the carrier learned of the suit before
the judgment became final. 767 S.W.2d at 850. Observing
that opening of the judgment was uncertain, the court did
not assign any burden to the carrier to show that it would
have litigated the case or to explain why it did not enter the
litigation. Jd. at 850-51. Similarly, in Branscum, the court
held that prejudice resulted when a carrier learned of a final
default judgment, notwithstanding that the carrier had had
actual knowledge of the underlying accident, had engaged in
settlement negotiations, and had known of an impending
suit. 803 S.W.2d at 463-64.
These cases demonstrate that the Texas courts do not
utilize a “substantial prejudice” standard and do not impose
on carriers the burden of explaining non-action such as
failure to obtain papers in an impending suit. Indeed, the
court in Branscum stated unequivocally that “application of
a ‘substantial’ prejudice standard is erroneous." Branscum,
803 S.W.2d at 467.
Upon review of the Texas caselaw discussed above, we
predict that the Texas courts would apply a standard of
prejudice somewhat lower than “substantial prejudice” and
closer to a concept of permitting carriers to deny coverage
when there is evideace of change in position adverse to a
carrier’s interest. See Branscum, 803 S.W.2d at 466;
Kimble, 767 S.W.2d at 851. Although the change must
obviously be material under this standard of prejudice, the
carrier need not show that the change is irreversible in
order to demonstrate that prejudice has resulted. E.g.,
Kimble, 767 S.W.2d at 851 (holding of prejudice,
notwithstanding carrier’s rejection of option to petition to
A-59
vacate default). With these decisions in mind, we turn now
to a review of the district court’s conclusion.
B.
In concluding that the Carriers were prejudiced by
Texas Eastern’s delay of at least eight months in providing
notice, the district court assumed without deciding that
prejudice was a necessary element to the Carrier’s defense
of late notice. The district court then examined the events
that the parties do not dispute took place between
December, 1986 (the latest date that the duty to notify
accrued), and late August, 1987 (the date Texas Eastern
actually gave notice to the Carriers).
On December 15, 1986, several days after it had
received from its brcker a comprehensive list of carriers
and notice provisions, Texas Eastern proposed a cleanup
plan to the EPA. Op. at 149. (Four days later, Texas
Eastern met with EPA officials to discuss the establishment
of a framework for future discussions on remediating
contaminated on-site areas on Texas Eastern’s system. R. at
1036-37. Within a month, Texas Eastern had furnished
EPA with a summary of a preliminary environmental report
and a "Summary of Dioxin Sampling and Analysis." R. at
1036, ¢ 375-76.) As the district court noted:
By this time, Texas Eastern was
committed to remediating the PCB
contamination in its unlined earthen pits
and the only material dispute between
¥ —_ Here and in the following paragraphs, we have noted
parenthetically specifics to which the district court did not refer
expressly .
A-60
Texas Eastern and EPA was the extent of
the cleanup and the form of the agreement
which would be required.
Op. at 149.
In February of 1987, at approximately the same time
that the Houston Chronicle published an article detailing
Texas Eastern’s PCB-related problems, Texas Eastern
considered giving notice, but did not. Op. at 150-51. On
March 17, Texas Eastern testified before a United States
Senate Subcommittee regarding its PCB problem and the
status of its already ongoing settlement discussions with
EPA. And in April, settlement negotiations became
intensive, with EPA insisting that cleanup levels be based
on EPA’s "risk assessments" and with EPA demanding that
Texas Eastern consider off-site contamination and enter into
formal negotiations to discuss specific cleanup demands.
Op. at 151-52. It was at this point that Texas Eastern
entered into a consent decree with the Commonwealth of
Pennsylvania. Op. at 172. (That decree contained
numerous stipulations of fact, and it established testing and
monitoring methodologies and schedules that Texas Eastern
would follow. R. at 4968.)
By mid-August, significant and extensive negotiations
had already taken place, as indicated by the contents of a
letter dated August 18 from Carol Dinkins, Texas Eastern’s
negotiator, to EPA. Op. at 152. The letter summarizes
fifteen major issues for inclusion in a comprehensive
settlement, among them Texas Eastern’s proposal to pay
substantial civil penalties and oversight costs. R. at
808-809. (The letter also discloses Texas Eastern’s
bargaining position: "Texas Eastern proposes to undertake
a far greater commitment of work at many more sites than
EPA has ever seen any party voluntarily step forward to
OPS yh le. a ——. lh eee
A-61
work out... ." R. at 809.) A few days later, Texas
Eastern mailed its notice of claim, dated August 19, 1987,
to the Carriers.
With respect to these events, the district court held:
By the time Texas Eastern gave notice,
remedial efforts, testing and monitoring
had begun, and schedules and metho-
dologies to characterize the sites had been
established. Most importantly, Texas
Eastern had already presented to EPA its
proposed settlement terms, and thus
completely destroyed any meaningful
opportunity for the Carriers to shape
negotiations with EPA. The record makes
it abundantly clear that Texas Eastern
never wanted the Carriers to interfere with
what was a carefully negotiated settlement
with EPA and waited until the settlement
was substantially agreed upon before
providing any notice to the Carriers.
Op. at 172-73.
Texas Eastern does not dispute that, by August 19,
1987, the Carriers had lost an opportunity to participate
initially in "remedial efforts, testing, . . . monitoring, and
[establishment of] schedules and methodologies." Op. at
172-73. Indeed, Texas Eastern’s assertion that insurers do
not generally get involved in environmental investigations
and negotiations is without record support. See Br. for
Appellant at 31; Rep. Br. for Appellant at 3 n.3. Nor does
Texas Eastern dispute that, as of August 18, 1987, at least
one day before notice was provided, Texas Eastern had
already disclosed its bargaining position to EPA, or, in the
A-62
parlance of poker players, tipped its hand by, for example,
proposing to pay a substantial civil penalty and to undertake
a voluntary cleanup far greater than EPA had ever seen.
Under the law of Texas, these undisputed facts alone justify
the district court’s holding because they indicate prejudice
resulting from a material change in the Carriers’ bargaining
position. See Branscum, 803 S.W.2d at 466. Because the
above changes resulted in prejudice, we need not address
the Carriers’ additional arguments that prejudice resulted
from Texas Eastern’s waiver of rights against the United
States and from Texas Eastern’s renewal of its insurance
contracts prior to notifying the Carriers of the claim.
Cc.
Because prejudice to the carriers flows from the ex
parte participation of Texas Eastern in its field
investigations and in its negotiations, it follows that Texas
Eastern’s disputations that "there was no ‘done deal’
between Texas Eastern and EPA in August, 1987" are not
persuasive. The district court did not say that the matter
was a "done deal,” but that "the matter was for all intents
and purposes . . . a ‘done deal.’" Op. at 170 (emphasis
added). Indeed, most, if not all, of the points in the August
18 letter found their way, in some form or other, into the
final consent decree. Compare R. at 805 (Dinkins’s letter)
with R. at 557 (consent decree).
Moreover, Texas Eastern’s assertions that the Carriers
had the option of entering the negotiations after August 18,
1987, are immaterial to the issue of whether prejudice
occurred prior to that date through a material change in
position. In Kimble, a carrier chose not to enter litigation,
even though there remained time to do so. 767 S.W.2d at
846. As the court in Branscum noted:
Pee ome a
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The Kimble court held that prejudice
results to the insurer by the change in its
position brought about by the insured’s
failure to forward the suit papers until
after the default. Prejudice results even
though the option to file a new trial is still
available to the insurer. Kimble, 767
S.W.2d at 851.
Branscum, 803 S.W.2d at 466 (emphasis added). By
analogy, prejudice resulted here even though the option to
enter negotiations was still available to the Carriers.
Texas Eastern submits one further challenge to the
district court’s determination of prejudice, namely, that the
Carriers must show that they would have entered
negotiations earlier and that they could have altered the
outcome. This challenge, however, seeks to apply the
"substantial prejudice” standard to the Carriers, whereas the
tone and tenor of extant Texas caselaw indicates that the
application of that standard would be erroneous.” See,
e.g., Branscum, 803 S.W.2d at 467.
¥ The position of the dissent, that the carriers must demonstrate that
they would have entered into negotiations in order to demonstrate
prejudice from late notice, see dissent at 11, Joes not comport with our
reading of the Texas caselaw. Moreover, the dissent’s approach would
inappropriately render a notice defense unavailable under Texas law
any time a carrier also asserted other bona fide defenses to coverage.
For example, a carrier might refuse to defend against a battery
claim on the grounds that a policy clearly limited the carrier’s obligation
to the defense of negligence. That carrier would never be able to meet
the dissent’s "actual prejudice” standard, no matter how egregious the
lateness of notice.
are
A-64
D.
Because we have determined that the district court
correctly concluded that the carriers were prejudiced, we
need not address the remaining contentions of Texas
Eastern.
Il.
For the foregoing reasons, we will affirm the judgment
of the district court as to liability of Texas Eastern in all
three cases.
ALITO, Circuit Judge, dissenting in part: (Dissent #2
of 2)
In my dissent from the majority’s separate opinion
concerning the jurisdictional issues presented in this appeal,
I explain why I believe that the district court lacked
jurisdiction with respect to two of three actions that were
before it: the Texas Eastern and AEGIS actions. That
dissent also addresses the question whether TETCO’s excess
insurers are properly parties in the third action: the F & C
action. In this opinion, I explain why I believe that the
district court’s grant of summary judgment in favor of
F & C in the F & C action should be partially reversed.
The F & C action involved the availability of coverage
for TETCO’s PCB-related problems under a series of
policies that were in effect from 1961 through 1988. All of
these policies generally required TETCO to notify F & C
“as soon as practicable" after becoming aware of an
"occurrence" that appeared likely to trigger coverage. The
policies effective on or after May 1, 1973, provide that
F & C could deny coverage based on lack of timely notice
rar tne eee so
its fp hes
a EH POSTEO
A-65
only if it suffered some degree of actual prejudice. By
contrast, under the earlier policies, lack of timely notice
allowed F & C to deny coverage without any inquiry into
prejudice. The policies in effect from July 1, 1970, through
January 1, 1981, also contain a clause excluding coverage
for damage caused by pollution unless the pollution was
"sudden and accidental."!/ The earlier and later policies
do not contain this pollution exclusion clause.
Because TETCO’s policies with F & C provided
coverage for damage to the property of others but not to
TETCO’s own property, the notice requirement meant, as
the district court concluded, that TETCO was obligated to
notify its insurers promptly upon learning that PCBs were
migrating beyond its own property lines, since off-site
migration was the "occurrence" likely to produce claims
potentially covered by the policies.” The district court
Y The exclusion clause reads:
This policy does not apply . . . to bodily injury or
property damage arising out of the discharge,
dispersal, release or escape of smoke, vapors, soot,
fumes, acids, alkalis, toxic chemicals, liquids or
gases, waste materials or other irritants, con-
taminants or pollutants into or upon land, the
atmosphere or any watercourse or body of water;
but this exclusion does not apply if such discharge,
dispersal, release or escape is sudden and
accidental.
2” Because of my conclusion that the merits of the coverage dispute
between TETCO and its excess insurance carriers were not properly
before the district court, I need only consider the effect of TETCO’s
late notice on F & C. However, since the majority considers the
question of late notice with respect to the insurance Carriers as a group,
and because I agree with the majority that such treatment is appropriate,
I write in terms of the effect of late notice on all insurers.
|
3
:
|
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A-66
held that this notice obligation accrued no later than
December 1986 — the month during which TETCO _—
received a report documenting off-site PCB migration. But
even if this obligation did not arise until as late as May
1987 — when the EPA demanded cleanup measures aimed
at preventing additional off-site migration — TETCO’s
notice in August 1987 could not reasonably be regarded as
having been given "as soon as practicable." TETCO is
certainly capable of moving faster than this when its own
interests are at stake. Thus, I agree with the district court
and the panel majority that TETCO did not comply with its
notice obligation. On this basis, I agree that the district
court properly granted summary judgment in favor of
F & C with respect to those claims falling under the earlier
policies that did not require a showing of actual prejudice.
With respect to claims under the more recent policies,
however, Texas law allowed coverage to be denied because
of late notice only if the insurers suffered actual prejudice.
See Maj. Op. #2, Typescript at 13-16. Unlike the majority,
I am convinced that summary judgment for the insurers on
the issue of actual prejudice was improper. The majority
correctly observes that TETCO’s late notice deprived the
insurers of the opportunity to participate in the settlement
negotiations between TETCO and the EPA that took place
during the summer of 1987. I wholeheartedly agree that
these were important discussions and that the insurers
suffered prejudice if, given the opportunity, the insurers
would have participated in or at least seriously considered
participating in these discussions. But what if the insurers
would not have participated in these discussions or even
seriously considered doing so? Could it then be said that
they suffered prejudice in any meaningful sense? I do not
think so.
a
i
A-67
Before holding that TETCO’s claims are barred because
the insurers were prejudiced, I think we should require at
least some support in the summary judgment record
indicating that the insurers would or realistically might have
availed themselves of the supposedly valuable opportunity
that they lost. There is, however, no such support — no
affidavits or other support concerning (a) what the insurers
would have done in this case had they received prompt
notice, (b) these insurers’ usual practices regarding
involvement in EPA settlement negotiations in cases such as
this, or (c) prevailing practices in the insurance industry as
a whole in comparable cases.
In this case, although the insurers’ potential liability
was huge they had many promising legal defenses. Under
these circumstances, it may well be that the insurers, if
given prompt notice, would have summarily concluded that
their best strategy was to let TETCO negotiate on its own
and then to litigate any subsequent claims for coverage.
This is precisely the strategy that the insurers did adopt
after they received TETCO’s notice. Without anything in
the summary judgment record to show that the insurers
would not have taken this approach had they received notice
more promptly, I do not think that summary judgment on
this issue was proper.
While I cannot agree that the insurers were entitled to
summary judgment on the issue of actual prejudice, I agree
that they were entitled to summary judgment with respect to
some of the policies on an alternative ground cited by the
district court: the presence of a pollution exclusion clause
in some of the policies. According to the district court,
summary judgment against TETCO was proper as to these
policies because the damage caused by off-site PCB
migration was not "sudden and accidental." For essentially
i
i
:
:
i
:
i
:
4
A-68
the reasons given by the district court,” I believe that this
alternative holding was correct. Accordingly, I would
affirm the district court’s grant of summary judgment in
favor of F & C as to the policies containing both an actual
prejudice requirement and this pollution exclusion clause.
In sum, I would affirm in part and vacate in part the
grant of summary judgment in favor of F & C in the F & C
case, and I would remand that case to the district court for
further proceedings.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
¥ Dist. Ct. Op. at 123-37.
A-69
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 92-1638
IN RE: TEXAS EASTERN TRANSMISSION CORP. PCB
CONTAMINATION INSURANCE COVERAGE LITIGATION (MDL No.
764)
ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES, LTD.;
NATIONAL SURETY CORPORATION
v.
TEXAS EASTERN TRANSMISSION CORPORATION;
FIDELITY & CASUALTY INSURANCE COMPANY OF NEW YORK;
CERTAIN UNDERWRITERS AT LLOYDS OF LONDON, INCLUDING
THE INSURANCE COMPANY OF IRELAND;
AETNA CASUALTY AND SURETY COMPANY;
AMERICAN HOME ASSURANCE COMPANY;
BOSTON OLD COLONY INSURANCE COMPANY;
CONTINENTAL CASUALTY INSURANCE COMPANY;
FIRST STATE INSURANCE COMPANY;
HIGHLANDS INSURANCE COMPANY;
THE HOME INSURANCE COMPANY;
INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA;
INTERNATIONAL INSURANCE COMPANY;
LEXINGTON INSURANCE COMPANY;
MIDLAND INSURANCE COMPANY
MUTUAL MARINE INSURANCE COMPANY;
PRUDENTIAL REINSURANCE COMPANY;
RANGER INSURANCE COMPANY;
REPUBLIC INSURANCE COMPANY;
STONEWALL INSURANCE COMPANY;
PENNSYLVANIA INSURANCE GUARANTY ASSOCIATION;
UNITED STATES OF AMERICA;
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
(D.C. Civil No. 88-02126)
A-70
THE FIDELITY & CASUALTY CO. OF NEW YORK
v.
THE TEXAS EASTERN TRANSMISSION CORP.
(D.C. Civil No. 88-05039)
TEXAS EASTERN TRANSMISSION CORPORATION
v.
FIDELITY & CASUALTY COMPANY OF NEW YORK;
ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES, LTD;
AETNA CASUALTY AND SURETY COMPANY;
AMERICAN HOME ASSURANCE COMPANY, a/k/a
AMERICAN HOME INSURANCE COMPANY;
BOSTON OLD COLONY INSURANCE COMPANY;
CIGNA INSURANCE COMPANY;
CONTINENTAL CASUALTY COMPANY;
EMPLOYERS MUTUAL CASUALTY COMPANY;
FIRST STATE INSURANCE COMPANY;
HIGHLANDS INSURANCE COMPANY;
THE HOME INSURANCE COMPANY;
THE INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA;
INTERNATIONAL INSURANCE COMPANY;
LEXINGTON INSURANCE COMPANY;
MIDLAND INSURANCE COMPANY
NATIONAL SURETY CORPORATION;
PRUDENTIAL REINSURANCE COMPANY;
RANGER INSURANCE COMPANY;
REPUBLIC INSURANCE COMPANY;
STONEWALL INSURANCE COMPANY;
UNITED STATES FIRE INSURANCE COMPANY;
CERTAIN UNDERWRITERS AT LLOYD’S, LONDON
and CERTAIN LONDON MARKET INSURANCE COMPANIES
(D.C. Civil No. 88-05707)
Texas Eastern Transmission Corporation,
Appellant
A-71
Appeal from the United States District Court
for the Eastern District of Pennsylvania
Present. MANSMANN, ALITO and ALDISERT, Circuit Judges.
ORDER
It is ORDERED that the Clerk of this court vacate the
panel’s opinion and judgment filed May 28, 1993, which
vacatur was inadvertently omitted from our order dated
August 18, 1993, granting panel rehearing.
BY THE COURT, :
Circuit Judge
A-72
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 92-1638
IN RE: TEXAS EASTERN TRANSMISSION CORP. PCB
CONTAMINATION INSURANCE COVERAGE LITIGATION
(MDL No. 764)
ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES, LTD.;
NATIONAL SURETY CORPORATION
vs.
TEXAS EASTERN TRANSMISSION CORPORATION;
FIDELITY & CASUALTY INSURANCE COMPANY OF NEW
YORK; CERTAIN UNDERWRITERS AT LLOYDS OF LONDON,
INCLUDING THE INSURANCE COMPANY OF IRELAND;
AETNA CASUALTY AND SURETY COMPANY; AMERICAN
HOME ASSURANCE COMPANY; BOSTON OLD COLONY
INSURANCE COMPANY; CONTINENTAL CASUALTY
INSURANCE COMPANY; FIRST STATE INSURANCE COMPANY;
HIGHLANDS INSURANCE COMPANY; THE HOME INSURANCE
COMPANY; INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA;
INTERNATIONAL INSURANCE COMPANY; LEXINGTON
INSURANCE COMPANY; MIDLAND INSURANCE COMPANY
MUTUAL MARINE INSURANCE COMPANY; PRUDENTIAL
REINSURANCE COMPANY; RANGER INSURANCE COMPANY;
REPUBLIC INSURANCE COMPANY; STONEWALL INSURANCE
COMPANY; PENNSYLVANIA INSURANCE GUARANTY
ASSOCIATION; UNITED STATES OF AMERICA;
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
(D.C. Civil No. 88-02126)
THE FIDELITY & CASUALTY CO. OF NEW YORK
v.
- .
—eoJX~——e————eeeeeeeeeeeeeee
td Misti frat Uren
ee a
A-73
THE TEXAS EASTERN TRANSMISSION CORP.
(D.C. Civil No. 88-05039)
TEXAS EASTERN TRANSMISSION CORPORATION
v.
FIDELITY AND CASUALTY COMPANY OF NEW YORK;
ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES, LTD.;
AETNA CASUALTY AND SURETY COMPANY;
AMERICAN HOME ASSURANCE COMPANY, a/k/a
AMERICAN HOME INSURANCE COMPANY;
BOSTON OLD COLONY INSURANCE COMPANY;
CIGNA INSURANCE COMPANY;
CONTINENTAL CASUALTY COMPANY;
EMPLOYERS MUTUAL CASUALTY COMPANY;
FIRST STATE INSURANCE COMPANY;
HIGHLANDS INSURANCE COMPANY;
THE HOME INSURANCE COMPANY;
THE INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA;
INTERNATIONAL INSURANCE COMPANY;
LEXINGTON INSURANCE COMPANY;
MIDLAND INSURANCE COMPANY;
NATIONAL SURETY CORPORATION;
PRUDENTIAL REINSURANCE COMPANY;
RANGER INSURANCE COMPANY;
REPUBLIC INSURANCE COMPANY;
STONEWALL INSURANCE COMPANY;
UNITED STATES FIRE INSURANCE COMPANY;
CERTAIN UNDERWRITERS AT LLOYD'S, LONDON
and CERTAIN LONDON MARKET INSURANCE COMPANIES
(D.C. Civil No. 88-05707)
Texas Eastern Transmission Corporation,
Appellant
Present: MANSMANN, ALITO AND ALDISERT,
Circuit Judges.
A-74
ORDER
The mandate in all three consolidated District Court cases
in this appeal is stayed. The Petition for Panel Rehearing
filed by appellees is hereby granted but is limited exclusively
to the matters raised in the petition. Oral argument will be
held on Thursday, September 30, 1993, at 2:00 p.m. The
parties may file letter briefs in addition to their previously
filed briefs. An original shall be filed with the Clerk’s Office
with a copy to each judge at his or her chambers. The
appellant’s brief will be due September 8, 1993, and the
appellees’ brief will be due on September 22, 1993. These
briefs should address the following questions:
1) the structure and purpose of 28 U.S.C. § 1330:
2) what claims, if any, have been asserted by
AEGIS against ICI;
3) whether the presence of all parties destroys
supplemental jurisdiction in the F & C case.
A-75
In addition, the parties may present any further information
they deem relevant. Appellant shall furnish the court with
copies of the AEGIS complaint.
BY THE COURT,
Circuit Judge
Dated: August 18, 1993
A-76
NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 92-1638
IN RE: TEXAS EASTERN TRANSMISSION CORP. PCB
CONTAMINATION INSURANCE COVERAGE LITIGATION (MDL No.
764)
ASSOCIATED ELECTRIC & GAS INSURANCE
SERVICES, LTD.; NATIONAL SURETY CORPORATION
vs.
TEXAS EASTERN TRANSMISSION CORPORATION;
FIDELITY & CASUALTY INSURANCE COMPANY OF NEW YORK;
CERTAIN UNDERWRITERS AT LLOYDS OF LONDON, INCLUDING
THE INSURANCE COMPANY OF IRELAND;
AETNA CASUALTY AND SURETY COMPANY;
AMERICAN HOME ASSURANCE COMPANY;
BOSTON OLD COLONY INSURANCE COMPANY;
CONTINENTAL CASUALTY INSURANCE COMPANY;
FIRST STATE INSURANCE COMPANY;
HIGHLANDS INSURANCE COMPANY;
THE HOME INSURANCE COMPANY;
INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA;
INTERNATIONAL INSURANCE COMPANY;
LEXINGTON INSURANCE COMPANY;
MIDLAND INSURANCE COMPANY;
MUTUAL MARINE INSURANCE COMPANY;
PRUDENTIAL REINSURANCE COMPANY;
RANGER INSURANCE COMPANY;
REPUBLIC INSURANCE COMPANY;
STONEWALL INSURANCE COMPANY;
PENNSYLVANIA INSURANCE GUARANTY ASSOCIATION;
UNITED STATES OF AMERICA;
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
(D.C. Civil No. 88-02126)
A-77
THE FIDELITY & CASUALTY CO. OF NEW YORK
v.
THE TEXAS EASTERN TRANSMISSION CORP.
(D.C. Civil No. 88-05039)
TEXAS EASTERN TRANSMISSION CORPORATION
v.
FIDELITY AND CASUALTY COMPANY OF NEW YORK;
ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES, LTD.;
E AETNA CASUALTY AND SURETY COMPANY;
; AMERICAN HOME ASSURANCE COMPANY, a/k/a
AMERICAN HOME INSURANCE COMPANY;
3 BOSTON OLD COLONY INSURANCE COMPANY;
CIGNA 'NSURANCE COMPANY;
CONTINENTAL CASUALTY COMPANY;
EMPLOYERS MUTUAL CASUALTY COMPANY;
FIRST STATE INSURANCE COMPANY;
HIGHLANDS INSURANCE COMPANY;
THE HOME INSURANCE COMPANY;
THE INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA;
INTERNATIONAL INSURANCE COMPANY;
LEXINGTON INSURANCE COMPANY;
MIDLAND INSURANCE COMPANY
NATIONAL SURETY CORPORATION; :
PRUDENTIAL REINSURANCE COMPANY; i
RANGER INSURANCE COMPANY; ti
REPUBLIC INSURANCE COMPANY;
STONEWALL INSURANCE COMPANY;
UNITED STATES FIRE INSURANCE COMPANY;
CERTAIN UNDERWRITERS AT LLOYD’S, LONDON |
and CERTAIN LONDON MARKET INSURANCE COMPANIES
(D.C. Civil No. 88-05707)
aa
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Texas Eastern Transmission Corporation,
Appellant
Appeal from the United States District Court
for the Eastern District of Pennsylvania
District Judge: Honorable Donald W. VanArtsdalen
Argued
April 7, 1993
Before: MANSMANN, ALITO and ALDISERT, Circuit Judges.
(Filed MAY 28 1993)
OPINION OF THE COURT
MANSMANN, Circuit Judge.
Texas Eastern Transmission Corporation claimed that
its comprehensive general liability insurance carriers (the
"Carriers") must pay for damages associated with the cost
of removing PCBs that present a danger of polluting the
property of third parties. The district court granted
summary judgment against Texas Eastern on the theory that
Texas Eastern provided prejudicially late notice of its claim
to the carriers. We will affirm.
I.
The relevant facts, which appear in great detail in the
district courts opinion, may be summarized as follows.
Until the early 1970s, Texas Eastern Used a toxic,
PCB-laden lubricant in compressor stations along a pipeline
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that stretched 9,500 miles, from Texas to New York. The
lubricant comingled with other toxic fluids in the pipeline,
and Texas Eastern discharged those fluids into the
environment, either by venting then into the air during
start-up or shut-down, or by discharging them into earthen
pits, which occasionally overflowed. Texas Eastern would
also occasionally spray fluids from the pits to kill weeks or
to control dust.
As early as 1972, the lubricant’s manufacturer informed
Texas Eastern that the lubricant contained toxic PCBS.
Throughout the late 1970s and early 1980s, Texas Eastern
became increasingly aware that PCBs were entering the
environment via the pipeline fluid. The district court
determined that, taking all inferences in favor of Texas
Eastern, a genuine issue of material fact existed as to
whether Texas Eastern knew between 1970 and December
1986 that PCBs were present in the pipeline fluid and that
the PCBS could migrate, via the pipeline fluid, onto the
property of third parties. That issue was critical because
such knowledge would trigger Texas Eastern’s obligation to
notify Carriers of an insurable "occurrence" under the
relevant insurance policies.
Employing the correct summary judgment standard, the
district court determined that although a rational factfinder
could conclude that Texas Eastern knew PCBs were
migrating to the property of third parties as early as 1972,
December of 1986 was the latest possible date a jury could
conclude that Texas Eastern discovered that PCBs were
migrating onto the property of third parties. The district
court based its determination in part on Texas Eastern’s
concession that in December, 1986, a preliminary report
commissioned by Texas Eastern gave it reason to know that
PCBs were migrating off-site.
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As we review in more detail below, between
December, 1986, and August, 1987, Texas Eastern entered
into at least one consent decree and negotiated in earnest
with the Environmental Protection Agency. After some
months of negotiation with EPA, Texas Eastern notified the
Carriers of a potential occurrence giving rise to a claim.
The cost of clean-up is now estimated at $750 million.
Fidelity and Casualty, Texas Eastern’s primary carrier,
brought a suit premised on diversity jurisdiction, seeking a
declaratory judgment that it was not liable under its policy
for the claims. Associated Electric & Gas Insurance
Services, Ltd. ("AEGIS") and National Surety Corporation,
other carriers of Texas Eastern, brought a second suit
against Texas Eastern and all of the remaining carriers.
Federal subject matter jurisdiction in the AEGIS action was
premised on the Foreign Sovereign Immunities Act, which
we will address below. Texas Eastern brought a third,
State-court action against all the carriers. That action was
removed to federal court, also on the basis of the
Immunities Act.
In an extensive opinion, the district court determined
that summary judgment should be entered against Texas
Eastern on the ground that its delay in providing notice to
the Carriers was unreasonable and prejudicial as a matter of
law. In re Texas Eastern Transmission Corporation PCB
Contamination Insurance Coverage Litigation, No.
MDL-764 (E.D. Pa. July 9, 1992).
We exercise plenary review of the district court’s grant
of summary judgment, applying "the same test the district
court should have used initially." Goodman v. Mead
Johnson & Co., 534 F.2d 566, 573 (3d Cir. 1976), cert.
denied, 429 U.S. 1038 (1977). See generally Celotex Corp.
v. Cartrett, 477 U.S. 317 (1986); Anderson v. Liberty
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Lobby, Inc., 477 U.S. 242 (1986); Matsushita Electric
Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986).
II.
As a threshold matter, we have established that the
district court had subject matter jurisdiction over the
dispute. Of the three cases that constitute this multi-district
litigation, one is properly premised on diversity jurisdiction
under 28 U.S.C. § 1332. Fidelity & Cas. Co. v. Texas
Eastern, No. 88-05039. The other two cases, Associated
Electric & Gas Ms. Svs. v. Texas Eastern, No. 88-021267
("AEGIS") and Texas Eastern v. Fidelity & Cas. Co., No.
88-05707, are premised on jurisdiction under the Foreign
Sovereign Immunities Act, which provides: "The district
courts shall have original jurisdiction without regard to
amount in controversy of any nonjury civil action against a
foreign state... . " 28 U.S.C. § 1330(a) (emphasis
added). In each of these two cases, Immunities Act
jurisdiction results from the presence as a defendant of the
Insurance Corporation of Ireland, Ltd. ("ICI"), which
qualifies as a "foreign state" because the Republic of Ireland
owns 100% of its stock and has assumed its obligations.
See 28 U.S.C. § 1603 (definition of "foreign state").
Texas Eastern has suggested that in the AEGIS case, we
must realign ICI as a plaintiff because ICI (a carrier) shares
the common purpose with AEGIS (another carrier) of
avoiding liability to Texas Eastern. Cf. Employers Ins. of
Wausau v. Crown Cork & Seal Co., 942 F.2d 862 (3d Cir.
1991) (realigning all insurers against insured to defeat
diversity jurisdiction). Texas Eastern, proceeding on the
false premise that realignment applies to Immunities Act
cases, argues that once the court realigns ICI as a plaintiff,
the suit is no longer "against" a foreign state and therefore
no longer subject to federal jurisdiction under 28 U.S.C.
§ 1330(a).
‘ag shinee Mr thiamin eininre naar Hite a tS GE at So NPS a he = St On wo
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Realignment, a creature of diversity jurisprudence,
serves the purpose of insuring the existence of complete
diversity. See generally Wright, Miller & Cooper, Federal
Practice & Procedure: Jurisdiction 2d § 3607, and cases
cited therein. Complete diversity, however, is a concept
foreign to the Immunities Act. Therefore, application of
realignment to Immunities Act jurisdiction would not serve
any purpose.
Indeed, Texas Eastern has not provided any authority to
support the novel application of realignment to Immunities
Act cases, nor are we aware of any binding authority. But
see Liberty Mutual Ins. v. Insurance Corp. of Ireland, 693
F. Supp. 340 (W.D. Pa. 1988) (Mencer, J.) (presuming
realignment would apply to Immunities Act cases).
Moreover, assuming arguendo that realignment did
apply, Texas Eastern fails to explain why ICI should be
realigned as a plaintiff. In Texas Eastern v. Fidelity and
Casualty, et al, removed to the federal court on the basis of
the Immunities Act, Texas Eastern sued all of its carriers as
defendants. Texas Eastern has not articulated a principled
reason to realign ICI as a plaintiff in the Texas Eastern
case, nor are we aware of any.” Thus, even if
realignment could apply to defeat subject matter jurisdiction
in the AEGIS case, realignment would not defeat subject
matter jurisdiction in the Texas Eastern case, and the parties
/ Even if, under some version of the well-pleaded complaint rule, we
could not construe the AEGIS complaint to state any cause of action
against ICI, we would be compelled under the same rule to construe
Texas Eastern’s complaint as stating a claim against ICI. Moreover, we
note that the “well-pleaded complaint" rule does not necessarily apply to
Immunities Act cases. See Verlinden B. V. v. Central Bank of Nigeria,
461 U.S. 480, 494-95 (1983).
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and the dispute would be properly before the federal
court.
We have jurisdiction of a final decision of the district
court. 28 U.S.C. § 1291.
Il.
In determining that late notice relieved te Carriers of
any obligation under the contracts, the district court reached
three central conclusions. First, Texas Eastern’s duty to
inform the carriers of an “occurrence” accrued not later
Y Texas Eastern suggests that ICI’s contractual consent to appear in
"any court of competent jurisdiction" deprives the federal courts of
jurisdiction under the Immunities Act. We do not, however, construe
the contractual waiver as anything more than a we’~er of the right to
contest in personam jurisdiction. In Foster v. Chesapeake Ins. Co., Ltd,
933 F.2d 207 (3d Cir. 1991), we held that a similar contractual
provision constituted a waiver of the right to remove a diversity suit.
We expressly recognized, however, that the Court of Appeals for the
Sixth Circuit, "primarily driven by considerations peculiar to the FSIA,”
reached the opposite result with respect to removal of a suit premised on
Immunities Act jurisdiction. Jd. at 1218 n.15. While the dissent does
not find the Diversity/Immunities Act distinction significant, dissent at
3, we have already acknowledged some “peculiar” distinctions. Foster,
933 F.2d at 1218 n.15
Moreover, Texas Eastern argued on appeal that because of the
contractual waiver, "there was never federal jurisdiction over the
TETCO action.” Br. of Appellant at 69. In this argument, Texas
Eastern was clearly incorrect. The waiver would not deprive a federal
court of its competency, under Article III and under the laws of the
United States, to pass on the merits of the dispute. While parties may
agree not to litigate in federal court, they cannot, by contract, destroy a
federal court’s subject matter jurisdiction any more than they can confer
it by contract.
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than December of 1986. Second, Texas Eastern provided
unreasonably late notice to the Carriers eight or nine months
later, in August of 1987. Third, the unreasonably late
notice prejudiced the Carriers. Although Texas Eastern
challenges all three conclusions, only the third, regarding
prejudice, merits some discussion.
A.
To predict the standard of prejudice applied under
Texas law, we must first review the relevant line of Texas
cases. The Texas Supreme Court long adhered to the rule
that an insured’s delay in providing notice relieved a carrier
of liability under the policy, even in the harsh case when
the carrier stipulated that it had not suffered any prejudice
at all. See Members Mutual Ins. Co. v. Cutaia, 476
S.W.2d 278 (Tex. 1972) (stating harsh rule).
In 1973, the Texas State Board of Insurance ordered
that the following Amendatory Endorsement be attached to
general liability policies:
As respects bodily injury liability coverage
and property damage liability coverage,
unless the company is prejudiced by the
insured’s failure to comply with the
requirement, any provision of this policy
requiring the insured to give notice of
action, occurrence or loss, or requiring the
insured to forward demands, notices,
summons or other legal process, shall not
bar liability under this policy.
See R. at 869-72 (Order of Insurance Board).
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Our task is to determine what constitutes prejudice,
under Texas law, as a matter of law. Although "there is a
paucity of authority explicating what, within the purview of
the endorsement, would constitute prejudice sufficient to
relieve an insurer of liability," Kimble v. Aetna Casualty &
Surety Co., 767 S.W.2d 846, 850 (Tex. App. Ct. 1989), at
least one Texas appellate court has stated clearly that
prejudice results to the insurer by "the change in its
position" brought about by an insured’s failure to notify.
Members Ins. Co. v. Branscum, 803 S.W.2d 462, 466 (Tex.
Ct. App. 1991) (emphasis added) (citing Kimble, 767
S.W.2d at 851).
While we find helpful the change-in-position elaboration
on the iegal meaning of prejudice, the question remains how
substantial that change in position must be before a court
can conclude that, as a matter of law, a carrier has suffered
prejudice. In some states, for example, courts have
imposed a “substantial prejudice" standard, which requires a
demonstration that an insurer could have either defeated a
claim or settled for a smaller sum than the sum for which
the insured ultimately settled. Insurance Co. of Pa. v.
Associated Int’l Ins. Co., 922 F.2d 516, 524 (9th Cir. 1990)
(applying California law). To determine the extent of harm
sufficient to constitute prejudice under Texas law, we find
instructive the facts of several Texas cases.
In a number of cases, Texas courts have held that
notice to a carrier after the entry of a default judgment has
become final constitutes prejudice, as a matter of law,
sufficient to defeat the carrier’s liability under a policy.
See, e.g., Ratcliff v. National County Mut. Fire Ins. Co.,
735 S.W.2d 955, 957 (Tex. Ct. App. 1987). ‘Compare
Allstate Ins. Co. v. Pare, 688 S.W.2d 680 (Tex. Ct. App.
1984) (no prejudice where insurer received papers before
default and had negotiated for settlement prior to default).
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Notably, the court in Ratcliff did not require the carrier to
show that it would have or could have defended the suit
successfully or reached a better settlement. We note also
that in the Kimble court determined that prejudice existed
notwithstanding that the carrier learned of the suit before
the judgment became final. 767 S.W.2d at 850. Observing
that opening of the judgment was uncertain, the court did
not assign any burden to the carrier to show that it would
have litigated the case or to explain why it did not alter the
litigation. Jd. at 850-51. Similarly, in Branscum, the court
held that prejudice resulted when a carrier learned of a final
default judgment, notwithstanding that the carrier had had
actual knowledge of the underlying accident, had engaged in
settlement negotiations, and had known of an impending
suit. 803 S.W.2d at 463-64.
These cases demonstrate that the Texas courts do not
utilize a “substantial prejudice" standard and do not impose
on carriers the burden of explaining non-action such as
failure to obtain papers in an impending suit. Indeed, the
court in Branscum stated unequivocally that "application of
a ‘substantial’ prejudice standard is erroneous." Branscum,
803 S.W.2d at 467.
Upon review of the Texas caselaw discussed above, we
predict that the Texas courts would apply a standard of
prejudice defined in terms of a change in position adverse to
a Carrier’s interest. See Branscum, 803 S.W.2d at 466;
Kimble, 767 S.W.2d at 851. Although the change must
obviously be material under this standard of prejudice, the
carrier need not show that the change is irreversible in
order to demonstrate that prejudice has resulted. E£.g.,
Kimble, 767 S.W.2d at 851 (holding of prejudice,
notwithstanding carrier’s rejection of option to petition to
vacate default). With these decisions in mind, we turn now
to a review of the district court’s conclusion.
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B.
In concluding that the Carriers were prejudiced by
Texas Eastern’s delay of at least eight months in providing
notice, the district court assumed without deciding that
prejudice was a necessary element to the Carrier’s defense
of late notice. The district court then examined the events
that the parties do not dispute took place between
December, 1986 (the latest date that the duty to notify
accrued), and late August, 1987 (the date Texas Eastern
actually gave notice to the Carriers).
On December 15, 1986, several days after it had
received from its broker a comprehensive list of carriers
and notice provisions, Texas Eastern proposed a cleanup
plan to the EPA. Op. at 149. (Four days later, Texas
Eastern met with EPA officials to discuss the establishment
of a framework for future discussions on remediating
contaminated on-site areas on Texas Eastern’s system. R. .
at 1036-37. Within a month, Texas Eastern had furnished
EPA with a summary of a preliminary environmental report
and a “Summary of Dioxin Sampling and Analysis." R. at
1036, { 375-76. » As the district court noted:
By this time, Texas Eastern was
committed to remediating the PCB
contamination in its unlined earthen pits
and the only material dispute between
Texas Eastern and EPA was the extent of
¥ Here and in the following paragraphs, we have noted
parenthetically specifics to which the district court did not refer
expressly.
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the cleanup and the form of the agreement
which would be required.
Op. at 149.
In February of 1987, at approximately the same time
that the Houston Chronicle published an article detailing
Texas Eastern’s PCB-related problems, Texas Eastern
considered giving notice, but did not. Op. at 150-51. On
March 17, Texas Eastern testified before a United States
Senate Subcommittee regarding its PCB problem and the
status of its already ongoing settlement discussions with
EPA. And in April, settlement negotiations became
intensive, with EPA insisting that cleanup levels be based
on EPA’s "risk assessments" and with EPA demanding that
Texas Eastern consider off-site contamination and enter into
formal negotiations to discuss specific cleanup demands.
Op. at 151-52. It was at this point that Texas Eastern
entered into a consent decree with the Commonwealth of
Pennsylvania. Op. at 172. (That decree contained
numerous stipulations of fact, and it established testing and
monitoring methodologies and schedules that Texas Eastern
would follow. R. at 4968.)
By mid-August, significant and extensive negotiations
had already taken place, as indicated by the contents of a
letter dated August 18 from Carol Dinkins, Texas Eastern’s
negotiator, to EPA. Op. at 152. The letter summarizes
fifteen major issues for inclusion in a comprehensive
settlement, among then Texas Eastern’s proposal to pay
substantial civil penalties and oversight costs. R. at
808-809. (The letter also discloses Texas Eastern’s
bargaining position: "Texas Eastern proposes to undertake
a far greater commitment of work at many more sites than
EPA has ever seen any party voluntarily stop forward to
work out... ." R. at 809.) A few days later, Texas
i : ; j |
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Eastern mailed its notice of claim, dated August 19, 1987,
to the Carriers.
With respect to these events, the district
court held:
By the time Texas Eastern gave notice,
remedial efforts, testing and monitoring
had begun, and schedules and metho-
dologies to characterize the sites had been
established. Most importantly, Texas
Eastern had already presented to EPA its
proposed settlement terms, and thus
completely destroyed any meaningful
opportunity for the Carriers to shape
negotiations with EPA. The record makes
it abundantly clear that Texas Eastern
never wanted the Carriers to interfere with
what was a carefully negotiated settlement
with EPA and waited until the settlement
was substantially agreed upon before )
providing any notice to the Carriers.
Op. at 172-73.
Texas Eastern does not dispute that, by August 19,
1987, the Carriers had lost an opportunity to participate
initially in “remedial efforts, testing, . . . monitoring, and
[establishment of] schedules and methodologies." Op. at
172-73. Indeed, Texas Eastern’s assertion that insurers do
not generally get involved in environmental investigations
and negotiations is without record support. See Br. for
Appellant at 31; Rep. Br. for Appellant at 3 n.3. Nor does
Texas Eastern dispute that, as of August 18, 1987, at least
one day before notice was provided, Texas Eastern had
already disclosed its bargaining position to EPA, or, in the
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parlance of poker players, tipped its hand by, for example,
proposing to pay «# substantial civil penalty and to undertake
a voluntary cleanup far greater than EPA had ever seen.
Under the law of Texas, these undisputed facts alone justify
the district court’s holding because they indicate prejudice
resulting from a material change in the Carriers’ bargaining
position. See Branscum, 803 S.W.2d at 466. Because the
above changes resulted in prejudice, we need not address
the Carriers’ additional arguments that prejudice resulted
from Texas Eastern’s waiver of rights against the United
States and from Texas Eastern’s renewal of its insurance
contracts prior to notifying the Carriers of the claim.
c.
Because prejudice flows from the bargaining position as
developed by Texas Eastern through its field investigations
and in its negotiations, it follows that Texas Eastern’s
disputations that "there was no ‘done deal’ between Texas
Eastern and EPA in August, 1987" are of no weight. The
district court remarked not that the matter was a "done
deal," but that "the matter was for all intents and
purposes . . . a ‘done deal.’" Op. at 170 (emphasis
added). Indeed, most, if not all, of the points in the August
18 letter found their way, in some form or other, into the
final consent decree. Compare R. at 805 (Dinkins’s letter)
with R. at 557 (consent decree).
Moreover, Texas Eastern’s assertions that the Carriers
had the option of entering the negotiations after August 18,
1987, are immaterial to the issue of whether prejudice
occurred prior to that date through a material change in
position. In Kimble, a carrier chose not to enter litigation,
even though there remained time to do so. 767 S.W.2d at
846. As the court in Branscum noted:
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The Kimble court held that prejudice
results to the insurer by the change in its
position brought about by the insured’s
failure to forward the suit papers until
after the default. Prejudice results even
though the option to file a new trial is still
available to the insurer. Kimbie, 767
S.W.2d at 851.
Branscum, 803 S.W.2d at 466 (emphasis added). By
analogy, prejudice resulted here even though the option to
enter negotiations was still available to the Carriers.
Texas Eastern submits one further challenge to the
district court’s determination of prejudice, namely, that the
Carriers must show that they would have entered
negotiations earlier and that they could have altered the
outcome. This challenge, however, seeks to apply the
"substantial prejudice" standard to the Carriers, whereas the
tone and tenor of extant Texas caselaw indicates that the
application of that standard would be erroneous. See,
e.g., Branscum, 803 S.W.2d at 467.
‘The position of the dissent, that the carriers must demonstrate that
they would have entered into negotiations in order to demonstrate
prejudice from late notice, see dissent at 11, does not comport with our
reading of the Texas caselaw. Moreover, the dissent’s approach would
inappropriately render a notice defense unavailable under Texas law any
time a carrier also asserted other bona fide defenses to coverage.
For example, a carrier might refuse to defend against a
battery claim on the grounds that a policy clearly limited the carrier’s
obligation to the defense of negligence. That carrier would never be
able to meet the dissent’s “actual prejudice” standard, no matter how
egregious the lateness of notice.
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D.
Because we have determined that the district court
correctly concluded that the carriers were prejudiced, we
need not address the remaining contentions of Texas
Eastern.
IV.
For the foregoing reasons, we will affirm the judgment
of the district court.
TO THE CLERK:
Please file the foregoing opinion.
Ciruit Judge
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In Re: Texas Eastern Transmission, No. 92-1638
ALITO, Circuit Judge, concurring in part and dissenting in
part.
I disagree with the majority’s conclusion that the
district court properly reached the substantive merits of all
three of the cases before it. I conclude instead that the
district court erred in ruling on the merits of two of the
three cases. I also disagree with the majority’s holding that
summary judgment was properly granted against Texas
Eastern Transmission Corporation ("TETCO") on the
question of whether the lateness of its notification to its
insurers caused any actual prejudice. I therefore dissent in
part.
I.
Three different civil actions were consolidated for
decision in the district court by the Judicial Panel on
Multidistrict Litigation. No challenge is made to the
propriety of the district court’s deciding the merits of one of
those actions, i.e., the case originally brought by Fidelity &
Casualty Company of New York ("F & C") against TETCO
in the United States District Court for the Northern District
of Texas. The merits of the other two cases, however,
were not properly in federal court.
A. One of these cases, Eastern District of
Pennsylvania docket number 88-05707, was originally filed
by TETCO in state court in Texas, naming all of TETCO’s
many excess liability carriers as defendants. It was then
removed to federal court by one of the defendants, the
Insurance corporation of Ireland (ICI), pursuant to 28
U.S.C. § 1441(d), which permits removal of a civil action
"against a foreign state as defined in [28 U.S.C.] section
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1603(a)." Assuming for the sake of argument that ICI falls
within the § 1603 definition of a "foreign state," this
removal appears at first glance to have been proper.”
However, the insurance contract between TETCO] and ICI
contained the following clause:
It is agreed that in the event of the failure
of the Underwriters hereon [i.e., ICI] to
pay any amount claimed to be due
hereunder, Underwriters hereon at the
request of the Insured (or Reinsured) [i.e.,
TETCO) will submit to the jurisdiction of
any court of competent jurisdiction within
the United States and will comply with all
requirements necessary to give such Court
jurisdiction and all matters arising
hereunder shall be determined in
accordance with the law and practice of
such Court.
TETCO timely moved in the district court for this
action to be remanded to Texas state court on the theory
that this clause was an enforceable contractual waiver of
ICI’s statutory right to remove lawsuits against it to federal
court.” The district court denied this motion. Subsequent
to the district court’s ruling on this issue, we decided Foster
’ The district court held that ICI was a "foreign state” as defined in
28 U.S.C. § 1603(a). TETCO argued to the contrary in the district
court and renews that argument on appeal. The district court’s holding
seems correct, but I do not find it necessary for me to reach that
question.
2% Because there is no other statutory ground for this action to be in
federal court, a remand would have been required if ICI’s removal was
not proper.
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v. Chesapeake Insurance Co., Lid., 933 F.2d 1207 (3d Cir.
1991), which concerned a reinsurance agreement containing
a virtually identical clause. We interpreted the clause to
constitute a waiver of the statutory right to remove based on
diversity of citizenship and held that the clause was not
unenforceable as unreasonable or against public policy.
Accord City of Rose City v. Nutmeg Insurance Co., 931
F.2d 13, 14-16 (Sth Cir. 1991). But see In re Delta
America Re Insurance Co., 900 F.2d 890 (6th Cir. 1990)
(similarly worded clause did not waive removal under 28
U.S.C. § 1441(d)); Proyecfin de Venezuela, S.A. v. Banco
Industrial de Venezuela, S.A., 760 F.2d 390 (2d Cir. 1985)
(differently worded clause did not waive removal under
§ 1441(d)). While our decision in Foster concerned
removal under 28 U.S.C. § 1441(a) rather than § 1441(d), I
do not find this distinction significant for present purposes.
Accordingly, I would apply Foster to this case and hold that
ICI waived its statutory right to remove the TETCO action
to federal court and that it was therefore reversible error for
the district court to deny TETCO’s motion requesting a
remand to state court. I would consequently vacate the
district court’s grant of summary judgment to the insurers in
this action and remand the case to the district court with
instructions to remand to the Texas state court.
B. Another of the actions that was before the district
court, docket number 88-02126, was originally filed in the
United States District Court for the Eastern District of
Pennsylvania by two of TETCO’s excess liability insurers,
Associated Electric & Gas Insurance services (AEGIS) and
National Surety (NS), naming as defendants TETCO, F &
C, and all of TETCO’s other excess liability insurers, one
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of which was ICI. The only suggested basis for the
subject matter jurisdiction of the federal court over the
action is 28 U.S.C. § 1330(a), which confers jurisdiction
over certain civil actions "against a foreign state as defined
in [28 U.S.C.] section 1603(a).” (I again assume arguendo
that the district court’s conclusion that ICI is a "foreign
state" is correct.) It is clear from the complaint that the
primary objective of this action was to obtain a declaratory
judgment that TETCO was not entitled to coverage under
any of the policies issued to it by the two named plaintiffs.
In the alternative, the plaintiffs sought a decla~atory
judgment regarding the rights and obligations of the various
insurers with respect to each other.
I do not believe that a civil action can be regarded as
"against" a foreign state for purposes of § 1330(a)
jurisdiction unless the legal interests of the named plaintiff
or plaintiffs, on the one hand, and the legal interests of the
foreign state, on the other hand, are sufficiently adverse that
the action would be considered "between" parties of diverse
citizenship for purposes of basing jurisdiction on 28 U.S.C.
§ 1332(a). Identifying such an actual adversity of interest,
rather than simply accepting the nominal alignment of
parties declared on the face of the pleadings, is especially
important because § 1330 bestows jurisdiction on actions
involving foreign state defendants under a wider array of
circumstances than other statutory provisions bestow
jurisdiction on actions involving foreign state plaintiffs. In
Employers Insurance of Wausau v. Crown Cork & Seal Co..
Inc., 905 F.2d 42, 46 (3d Cir. 1990), we held that unless
there is a "real dispute on a primary issue in the
controversy" between A and B, the case is not "between" A
2% The original complaint in this action also named as defendants
various governmental entities, all of which were subsequently dropped.
,
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and B for purposes of the diversity jurisdiction statute.
That test cannot be satisfied in the current case. There is
no "real dispute on a primary issue in the controversy"
between either AEGIS or NS on the one hand and ICI on
the other.
Employers Insurance of Wausau and related cases teach
that when the nominal alignment of the parties on the
pleadings does not reflect the underlying reality of adversity
of interest, the court must "realign" the parties according to
their true interests and see whether any basis for the
jurisdiction of the federal courts remains. Two obvious
realignments are possible here. The insurers contend that
"the logical alignment is TETCO as plaintiff and the
Carriers [including AEGIS and NS] as defendants"
(Appellees’ Joint Brief at 66). While this alignment would
make the action "against" ICI, I do not find it plausible. Its
most obvious flaw is that it would involuntarily render
T=fCO the plaintiff while denying TETCO the important
plaintiff's prerogative of choosing the forum for the
litigation. Indeed, such an alignment would make the case
almost exactly identical to the action TETCO originally
filed in its preferred forum. In addition, by making the
primary defendant, TETCO, into the plaintiff and the
original plaintiffs into defendants, such an approach could
easily justify subverting the limitations of § 1330 by turning
any action with a foreign state party into an action "against"
the foreign state.
The other possible alignment of parties is all of the
insurers, including ICI, as plaintiffs against TETCO as sole
defendant. Jurisdiction exists, given an amount in
Y Like Foster, this case was decided after the district court ruled on
the relevant issue.
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controversy in excess of $50,000, for civil actions
"between . . . a foreign state, defined in section 1603(a) of
this title, as plaintiff and citizens of a State or of different
States." 28 U.S.C. § 1332(a)(4). At least one court has
held that this section does not confer jurisdiction on an
action where there are any plaintiffs other than the foreign
state or states. L’Europeenne de Banque v. Republic of
Venezuela, 700 F. Supp. 114, 126 (S.D.N.Y. 1988). Even
if § 1332(a)(4) can support jurisdiction where the foreign
state plaintiff has co-plaintiffs which are not foreign states, I
believe in the absence of clear Congressional intent to the
contrary that "[t]he rule of complete diversity — that no
plaintiff and no defendant may be a citizen of the same state
— applies." F. & H.R. Farman-Farmian Consulting
Engineers Firm v. Harza Engineering Co., 882 F.2d 281,
284 (7th Cir. 1989). For cases brought under what is now
§ 1332(a)(1) this rule has been established since Strawbridge
v. Curtiss, 7 U.S. 267 (1806). It also applies to cases
brought under § 1332(a)(2). Newman-Green, Inc. v.
Alfonzo-Larrain, 490 U.S. 826 (1989); Depex Reinu 9
Partnership v. Texas Int’! Petroleum Corp., 897 F.2d 461
(10th Cir. 1990); Farman-Farmian, supra. There have been
a few cases brought under § 1332(a)(3) where jurisdiction
has been held not to be destroyed by the presence of aliens
on both sides of the litigation — even aliens who are
citizens of, or corporations incorporated in, the same
foreign country — but in all of these cases the American
plaintiffs have been completely diverse as to state
citizenship from the American defendants. E.g., Clark v.
Yellow Freight System, Inc., 715 F. Supp. 1377 (E.D.
Mich. 1989); K & H Business Consultants, Ltd. v.
Cheltonian, Lid., 567 F. Supp. 420 (D.N.J. 1983) (detailed
analysis of problem per Debevoise, J.); Samincorp, Inc. v.
Southwire Co., Inc., 531 F. Supp. 1 (N.D. Ga. 1980).
TETCO is treated by ithe diversity jurisdiction statute as if it
were a citizen both of Delaware, where it is incorporated,
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and Texas, where it maintains its principal place of
business. 28 U.S.C. § 1332(c)(1). Quite a number of
TETCO’s insurers other than ICI are either incorporated or
maintain their principal p e of business in either Delaware
or Texas. Therefore, I conclude that jurisdiction is not
available under § 1332(a)(4). For these reasons, I would
hold that the district court did not have jurisdiction over the
subject matter of this action, and would therefore vacate the
grant of summary judgement to the insurers against TETCO
and remand with instructions to dismiss the action for lack
of jurisdiction.
Il.
I now turn to the merits of the remaining case that was
before the district court, the declaratory judgment action
originally brought by against TETCO by F & C., TETCO’s
primary CGL insurer. This action involved the availability
of coverage for TETCO’s PCB-related problems under a
series of policies that were in effect from 1961 through
1988. All of these policies generally required TETCO to
notify F & C "as soon as practicable” after becoming aware
of an “occurrence” that appeared likely to trigger coverage.
For the policies effective on or after May 1, 1973, in order
to deny coverage the insurer must show that it has suffered
some degree of actual prejudice from the insured’s failure to
give notice as soon as practicable. For the earlier policies,
lack of timely notice is sufficient to deny coverage without
any inquiry into prejudice caused or not caused thereby.
The policies in effect from July 1, 1970 through January 1,
1981 also contained a clause excluding coverage for damage
caused by pollution unless the pollution was "sudden and
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accidental.* The earlier and later policies do not contain
this exclusion.
Since TETCO’s policies with F & C provided coverage
for damage to the property of others but not to TETCO’s
own property, the notice requirement meant, as the district
court concluded, that TETCO was obligated to notify its
insurers promptly upon learning that PCBs were migrating
beyond its own property lines, since off-site migration was
the “occurrence” likely to produce claims potentially
covered by the poli
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