United States Fire Insurance Company and the North River Insurance Company, in No. 98-1854 v. Asbestospray, Inc. Spraycraft, Inc. Asbestos Products Manufacturing Corporation H&a Construction Co., Inc. Grover C. Adams Joseph H. Albert George Ament Harvey J. Beecoft Herbert Oberry Best Eugene Borofsky Mayor and City Council of Baltimore Amchem Products, Inc. American Home Products Corporation Anchor Packing Co. A.P. Green Industries, Inc. Armstrong World Industries Containteed Corp. Dana Corporation Fibreboard Corporation Keene Corp. National Gypsum Company Stich, Angell, Kreidler, Brownson & Ballou, P.A. Wilson, Elser, Moskowitz, Edelman & Dicker Wilentz, Goldman & Spitzer v. Envision Claims Management Corporation John Doe 1-10, Individually Jane Doe 1-10, Individually Xyz Corp., 1-10, Bodies Corporate, Third-Party Stich, Angell, Kriedler, Brownson & Ballou, P.A., in No. 98-1153 the Estate of Frederick Whitaker and Weitz and Luxenberg, P.C., in No. 98-1154
Docket: 98-1153
Court: Court of Appeals for the Third Circuit; June 29, 1999; Federal Appellate Court
Two consolidated appeals were considered by the U.S. Court of Appeals for the Third Circuit involving the United States Fire Insurance Company and The North River Insurance Company (collectively referred to as "the Insurers") and various defendants, including Stich, Angell, Kreidler, Brownson, Ballou, P.A., and Weitz & Luxenberg, P.C.
In the first appeal, the court dismissed the appeal from the District Court's January 21, 1998 order, which had deemed an escrow fund distribution by the Stich, Angell firm to the Insurers as violating a prior injunction, citing a lack of jurisdiction.
In the second appeal, the Insurers challenged an August 28, 1998 order from the District Court that dismissed their statutory interpleader action on grounds of laches and lack of jurisdiction, as well as a ruling that the Insurers had waived certain attorney-client privileges. The appellate court determined that the District Court had jurisdiction over the interpleader action and reversed the dismissal on that basis. It found that the District Court erred in its assessment of the Insurers' delay in filing the interpleader and failed to allow the Insurers to present evidence justifying the delay. Consequently, the court vacated the dismissal based on laches and remanded for further proceedings. Additionally, the appellate court ruled that the Insurers did not waive their attorney-based privileges, reversing the lower court's ruling on that issue as well.
U.S. Fire and North River are excess insurers for Asbestospray Corporation, which, along with its related entities, is now bankrupt and facing over 27,000 personal injury lawsuits. Baltimore has secured an $8.33 million judgment against Asbestospray for asbestos removal costs. Asbestospray’s only asset is the insurance proceeds from policies providing excess coverage of $5 million per year from 1971 to 1976, totaling $25 million, activated only after primary coverage is exhausted. As of May 1995, the primary coverage was exhausted, obligating the insurers to defend Asbestospray in lawsuits, with defense costs reducing the policy limits. Between May 1995 and June 13, 1997, over $21 million was disbursed, including $6.5 million for settlements and $9.2 million for legal defense, leaving $3.88 million in unexhausted coverage. In 1984, Baltimore sued Asbestospray and other manufacturers for asbestos removal costs, winning a $8.33 million judgment in 1992, which was upheld on appeal. In 1993, Baltimore served writs of garnishment against the insurers, but the insurers denied coverage for these claims. A subsequent default judgment against the insurers was vacated, but the court denied their motion for summary judgment on coverage. From August 1996 to June 1997, the garnishment action was inactive. In September 1998, Baltimore sought to prevent the insurers from disbursing funds from an escrow account for settlements until Baltimore’s claim is resolved, leading to a court order halting further payments from the escrow to Asbestospray claimants.
Insurers initiated a statutory interpleader on June 13, 1997, filing a $3.88 million interpleader bond representing unpaid insurance policy proceeds. The District Court issued a restraining order the same day, preventing all claimants from pursuing actions against the Insurers for 20 days, later extended indefinitely. Baltimore opposed the interpleader, arguing issues of jurisdiction, laches, unclean hands, and that the interpleader was a way to bypass a garnishment action in Maryland. A hearing on these jurisdictional concerns was held on July 30, 1997, but the court did not issue a ruling at that time.
On July 18, 1997, Weitz, Luxenberg sought a court order in New York to compel payment of a $2 million settlement from an escrow fund. The New York Court ordered disbursement by July 31, but Browning, the escrow agent, withheld the payment on the Insurers' instructions and due to the June 13 Order. Weitz, Luxenberg filed for contempt against Browning, who notified the Insurers of his intent to wire funds if no court order was obtained. Failing to receive such an order by September 3, Browning transferred $2 million to Weitz, Luxenberg, prompting the Insurers to terminate him as escrow agent. The Insurers retained $5.39 million minus the disbursed settlement and posted an additional $3.39 million interpleader bond.
On September 8, the Insurers sought clarification of the restraining order. The District Court's January 21, 1998 ruling modified the June 13 Order to include funds held by third-party escrow holders and declared the transfer of funds to Weitz, Luxenberg violated the restraining orders, but did not impose any sanctions for this violation.
The January 21 Order addressed discovery issues, where defendants, including Baltimore, sought information regarding the filing of the interpleader action. Insurers objected, claiming attorney-client and work product privileges, which the District Court rejected, ruling the Insurers waived these privileges due to the alleged untimeliness of their filing. The Court found that the plaintiffs also waived any attorney-client privilege related to the rationale for the action, its timing, garnishments against the fund, liability calculations, and insurance proceeds transfers.
After the District Court denied motions to reconsider the January 21 Order, Baltimore filed a motion to dismiss the interpleader action on April 9, 1998, arguing lack of subject matter jurisdiction due to an insufficient interpleader bond. On August 28, the Court dismissed the case citing laches and bond insufficiency. The Insurers appealed this dismissal and the January 21 Order regarding attorney-client privilege, while Brownson, Stich, Angell, Whitaker, and Weitz, Luxenberg appealed the ruling that a transfer from the escrow fund violated the June 13 Order.
The jurisdiction over Stich and Angell's appeal of the January 21 Order was examined and ultimately dismissed. They claimed jurisdiction under 28 U.S.C. § 1292(a)(1), which pertains to interlocutory orders modifying injunctions. However, the appellate court concluded that the January 21 Order did not modify the June 13 Order but clarified its applicability to the funds held in escrow, thus preventing their transfer to Weitz, Luxenberg. The court emphasized that the substance of the order, rather than its wording, determines jurisdiction.
If the January 21 Order is viewed as a modification of the June 13 Order rather than a clarification, the District Court lacked grounds to declare that the previous transfer of funds to Weitz, Luxenberg violated the earlier order. Although the District Court used the word "MODIFIED," this is considered a drafting error, and the June 13 Order is deemed a clarification. Appellate jurisdiction under 28 U.S.C. 1292(a)(1) does not cover orders that merely interpret or clarify injunctions, as established in Motorola, Inc. v. Computer Displays Int'l, Inc. The argument for jurisdiction under the "collateral order" doctrine, which allows for review of a limited class of orders that do not conclude litigation, is rejected. The January 21 Order is deemed reviewable upon final judgment, and the issues raised do not present significant jurisprudential concerns warranting an exception to the finality rule. Consequently, Stich, Angell's appeal of the January 21 Order is dismissed.
Regarding laches, the District Court's dismissal of the interpleader action is vacated and remanded due to insufficient record development on the Insurers' delay and errors in calculating that delay. Both the duration of the delay and any resulting prejudice are factual questions subject to a "clearly erroneous" review standard. Although the legal conclusion about the inexcusable nature of the delay is subject to plenary review, the equitable evaluation of the situation is reviewed for abuse of discretion. Laches can lead to the dismissal of interpleader actions, though courts generally avoid such outcomes to prevent complications from multiple litigation and potential liabilities arising from the stakeholder's conduct.
A party asserting laches must prove (1) an inexcusable delay in bringing the action and (2) resulting prejudice. The burden of demonstrating prejudice lies with the party invoking laches, requiring them to show that the delay disadvantaged their ability to assert a right or defense, rather than simply losing what they would have retained. In this case, the District Court ruled as a matter of law that the Insurers' delay in filing an interpleader action was both unreasonable and prejudicial to potential claimants, leading to the dismissal of the action with prejudice. Although Baltimore raised laches in its answer, its motion to dismiss only addressed the insufficiency of the interpleader bond, preventing the Insurers from presenting their reasons for the delay or conducting discovery on the alleged prejudice.
The District Court determined that the Insurers should have known about the insufficient insurance pool by February 1993, imposing a duty to file the interpleader at that time. However, the Insurers’ coverage under their excess policies was not engaged until May 1995, when the primary coverage was exhausted, indicating that the District Court incorrectly assessed the delay from February 1993 to May 1995. The court also overlooked the Insurers' explanations regarding delays post-May 1995 due to an inadequate record. Furthermore, the Insurers argued that filing an interpleader while a valid judgment against them existed would risk dismissal and accusations of forum shopping. The District Court found that the Insurers’ settlements before filing the interpleader dissipated the insurance proceeds, causing prejudice to Baltimore and other claimants. However, the court did not allow adequate briefing or discovery on the prejudice issue, leading to the vacation of its finding of prejudice and a remand for further development of the record.
The District Court dismissed the interpleader action on the grounds that the bond amount was insufficient, as it did not cover the full $25 million of the insurance policy proceeds or the funds in the escrow account. However, the original interpleader bond of $3.88 million was deemed adequate, representing the amount reasonably in controversy. The court's dismissal was an error since a proper bond is a jurisdictional requirement for interpleader actions under 28 U.S.C. 1335(a)(2). The stakeholder must deposit the maximum amount for which they may be liable based on the controversy's subject matter. The Appellees claimed entitlement to the entire $25 million, but the court clarified that determining the appropriate deposit is not merely about the highest claim but depends on what the stakeholder asserts as the controversy's subject. Only amounts realistically within the interpleader's scope need to be deposited. The $3.88 million, representing unexhausted policy proceeds, was the correct amount to dispute, as claims beyond this amount lacked merit in the absence of fraud or collusion allegations against the insurers. The District Court's broad interpretation of its interpleader jurisdiction was inconsistent with the device's limited nature, as injunctions under 28 U.S.C. 2361 must not extend beyond the subject matter of the interpleader. The interpleader should not serve as a blanket resolution for unrelated disputes.
In interpleader actions, in personam jurisdiction is limited to the funds deposited with the court, and subject matter jurisdiction under 28 U.S.C. § 1335 pertains solely to conflicting claims to those funds. Federal courts should defer to earlier state court proceedings, especially when those have resulted in judgments or settlements, as indicated by 28 U.S.C. § 2283. The district court incorrectly determined that pre-interpleader settlements were part of the res subject to interpleader jurisdiction, leading to an erroneous dismissal of the interpleader for alleged insufficiency of the bond. The court's broad interpleader injunction also interfered with ongoing state proceedings, highlighting jurisdictional friction. Additionally, the district court's ruling that the Insurers waived attorney-client and work product privileges was found to be incorrect. Waiver occurs only when a party affirmatively places attorney advice at issue in litigation, which the Insurers did not do in this case. Consequently, the appeals court vacated the order dismissing the interpleader, reversed the ruling on privilege waiver, dismissed one appeal for lack of jurisdiction, and remanded for further proceedings.
The Honorable Arthur L. Alarcon, Senior Circuit Judge for the Ninth Circuit, addresses the appellants, referred to collectively as Stich, Angell. The court notes that if the District Court accepts the Insurers' explanation, the seven-month delay from vacatur to the interpleader commencement may not be deemed unreasonable. Baltimore's argument for affirming the District Court's decision based on unclean hands is rejected; the dismissal was not grounded in this doctrine. The court emphasizes that the current record lacks sufficient evidence to substantiate a claim of unclean hands, which requires evidence of fraudulent or bad faith actions. Although the District Court found some inequitable conduct related to delays and the alleged dissipation of insurance proceeds, this alone does not establish unclean hands without additional findings of misconduct.
The court vacates the District Court's finding of unreasonable delay and clarifies that even if the Insurers are found to have unreasonably delayed, this does not equate to unclean hands. It also states that any alleged dissipation would not suffice to establish unclean hands without evidence of fraud or bad faith. The court criticizes the District Court for dismissing the interpleader complaint without allowing the Insurers an opportunity to cure the alleged bond insufficiency, as the law allows stakeholders to remedy such defects. The Insurers have since bonded the remaining escrow sum under court jurisdiction, further supporting the argument against dismissal.
While the mandate does not impede Baltimore or other Appellees from pursuing independent claims against the Insurers in different legal contexts, it clarifies that claims related to the interpleader action must be confined to the unexhausted policy proceeds. Claims against the plaintiff unrelated to property claims need not compel the plaintiff to provide a bond for coverage.
