Greenway Center, Inc. v. Essex Insurance Company, Annette Maione, Individually and as Administrator of the Estate of Mark Willet
Docket: 05-3782
Court: Court of Appeals for the Third Circuit; January 29, 2007; Federal Appellate Court
The case involves Greenway Center, Inc. (GCI) and Essex Insurance Company regarding the determination of GCI's status as a successor in interest to Winco Acquisitions, Inc. (Winco). The district court ruled that it was barred by issue preclusion from reassessing this status, as a state court had previously made a ruling to that effect, leading to the conclusion that Essex must defend and indemnify GCI in a wrongful death lawsuit brought by Annette Maione, the administratrix of Mark Willet's estate.
The background includes Winco operating a detoxification center named Greenway, filing for Chapter 11 bankruptcy in 1997, and subsequently facing a wrongful death claim after Willet's death shortly after his admission to the facility. Following the revocation of Winco's operating license, Healthcare Management Associates, Inc. (HMA) was authorized by the Bankruptcy Court to manage the facility and later, GCI was incorporated by HMA's owners.
The insurance policy in question, issued by Essex, covered liabilities related to Greenway's operation and explicitly named Winco as the insured entity, containing a non-assignability clause restricting transfer of rights under the policy. Notably, GCI was not named in this policy. The appellate court found that the issue preclusion criteria were not satisfied and thus vacated the district court’s judgment, remanding the case for a fresh evaluation of GCI's successor status to Winco.
Essex initially hired attorney Frank Baker to represent GCI in a state court action but later denied coverage to GCI, concluding it was uninsured under its policy as of December 28, 1999. Baker withdrew from the case around March 30, 2000. GCI, formed after Willet's death and Winco's bankruptcy, could only be liable for the death if deemed a successor to Winco. Consequently, Maione mistakenly named GCI as the defendant in her wrongful death action. To correct this, on July 21, 2000, she filed a second action against Winco, which Essex defended. However, this action was dismissed on December 31, 2001, due to the expiration of the two-year statute of limitations following Willet's 1997 death.
On June 3, 2002, Maione filed a Motion to Correct the Name of the Defendant, seeking to amend the caption to include "Winco Acquisition, Inc. d/b/a Greenway Center" or "Greenway Center, Inc. as successor in interest to Winco Acquisition, Inc." She argued that both entities operated under the same name and location, and allowing the correction would enable a merits-based determination. In response, Essex retained Baker to file a Petition to Intervene for Winco, contending that Maione's motion was an improper late attempt to join Winco after the statute of limitations had expired. Winco asserted its independence from GCI and claimed that adding Winco would be prejudicial.
An evidentiary hearing occurred on September 17, 2002, and on October 9, 2002, Judge Peter J. O'Brien granted Maione's motion to amend the caption to "Greenway Center, Inc. as successor in interest to Winco Acquisitions, Inc." The appeal centers on the implications of this ruling, particularly regarding whether GCI is a successor in interest to Winco, thus liable for Winco's obligations and entitled to insurance rights under Pennsylvania law.
Judge O'Brien found that the facility where Willet was admitted has been consistently identified as 'Greenway Center.' In the fall of 1998, Winco submitted a Debtor's Plan of Reorganization to the U.S. Bankruptcy Court, which stated that Equity Security Holders, defined as shareholders, would surrender their ownership upon confirmation of the plan. Notably, the plan asserted that the shareholders would not retain their stock, which would instead vest in Greenway Center, Inc., thus complying with the Absolute Priority Rule under 11 U.S.C. Section 1129(b). The attorney representing Winco confirmed to the court that all stock of Winco Acquisition, Inc. would be transferred to Greenway Center, Inc. Judge O'Brien concluded that Greenway Center, Inc. was established to take over the stock from Winco Acquisition, Inc. post-bankruptcy and to operate the facility.
In the 'Discussion' section, Judge O'Brien determined that Greenway Center, Inc. is the successor in interest to Winco Acquisition, Inc. due to the confirmed Reorganization Plan. He noted that service had been properly executed on the appropriate representatives of the corporate entities and that continuing the action posed no prejudice to any party involved. He referenced the Supreme Court's observation in Paulish v. Bakaitis regarding the correction of party designations rather than substitution. Importantly, Judge O'Brien’s opinion did not address Pennsylvania’s successor in interest law or cite any legal authority regarding a successor corporation's liability. However, it explicitly stated that Greenway Center, Inc. is the successor to Winco Acquisition, Inc. based on the Bankruptcy Court's confirmed Reorganization Plan.
In 2003, GCI initiated a declaratory judgment action in Monroe County Court, asserting that Essex must defend and indemnify it in Maione's wrongful death action, as GCI was named as a successor to Winco Acquisition, Inc. Essex subsequently removed the action to the U.S. District Court, where a non-jury trial took place in April 2005, involving Maione, GCI, and Essex.
Two witnesses testified at trial: Wallace Slatinsky, former executive director of Greenway and a principal of GCI, and Richard Dowling, a senior claims examiner at Essex. Slatinsky stated that while Winco's bankruptcy plan proposed transferring all stock to GCI, no transfer occurred, and Winco continued to exist post-confirmation without involvement in Greenway Center or any other facility. GCI and Maione submitted evidence from HMA's filings to the Bankruptcy Court on behalf of Winco.
During closing arguments, GCI and Maione asserted that issue preclusion barred the court from reconsidering GCI's status as a successor in interest to Winco, citing a prior determination by the state court. They also contended, under Pennsylvania law, that GCI was indeed a successor in interest, a claim Essex contested.
The district court reviewed Judge O'Brien's opinion and confirmed that the state court had resolved the successor issue. Applying the five-part test from Veltri v. New Kensington, the district court found all criteria met: the issues were identical, the state court's ruling was a final judgment, Essex was in privity with Winco due to its role as insurer, and Essex had a full and fair opportunity to litigate the matter in state court. Consequently, the district court held that it was precluded from revisiting whether GCI is a successor in interest to Winco, affirming that GCI is a successor per the state court ruling. On July 18, 2005, Judge Munley issued a Memorandum and Verdict in favor of GCI, ruling that issue preclusion applied and that Essex must defend and indemnify GCI in Maione's state court action. The case proceeded to a timely appeal.
Essex contends that the requirements for applying issue preclusion do not apply in its case regarding liability to defend and indemnify GCI, following a state court order in Pennsylvania. Pennsylvania law stipulates four criteria for issue preclusion: (1) the issue in the current case must be identical to that in the prior adjudication; (2) there must be a final judgment on the merits; (3) the party against whom issue preclusion is asserted must have been a party or in privity with a party in the prior case; and (4) that party must have had a full and fair opportunity to litigate the issue previously. The burden of proof lies with the parties asserting issue preclusion, here GCI and Maione.
Essex argues that the first two criteria are not met. For the first criterion, Essex claims the state court did not resolve the substantive issue of whether GCI is a successor in interest to Winco, asserting that the ruling was procedural. However, the state court explicitly determined GCI to be a successor in interest, contradicting Essex's claim. Regarding the second criterion, Essex argues that the state court decision is not a 'final judgment.' The court rejects this argument, stating that Judge O'Brien's decision was firm and reached after thorough consideration.
The analysis then shifts to the third and fourth criteria, focusing on Essex’s lack of participation in the state court proceedings. Since Essex was not a party to that action, the key question is whether it was in privity with a party involved in the prior adjudication.
The district court determined that Winco's filing of a Petition to Intervene against Maione's motion to amend the caption indicated Winco's involvement in the underlying action. However, Winco was never a party to the state court action, and even if it were, Essex could not be considered in privity with Winco due to their conflicting interests regarding the outcome of Maione's motion. The district court's assertion of Winco's involvement lacked discussion and failed to recognize that Winco's Petition to Intervene was dismissed as moot, meaning it could not respond to Maione's motion. Participation by Winco's attorney did not establish party status for issue preclusion purposes.
Privity, defined as a mutual relationship to the same rights, typically exists between insurers and their insureds under Pennsylvania law. However, an exception arises when their interests conflict. This principle was illustrated in Vaksman v. Zurich General Accident, where the court ruled that Zurich was not in privity with Vaksman due to conflicting interests regarding the characterization of an injury (intentional vs. negligent). Thus, Zurich was not barred by issue preclusion from asserting its position, highlighting that conflicting interests negate the privity necessary for issue preclusion.
In Ranger Ins. Co. v. General Acci. Fire. Life Assurance Corp., the court examined an incident where Gaylor was injured in a van driven by a Delaware County employee, which was covered by a liability policy from Ranger. After Gaylor and the County reached a settlement, Rossi sought to be recognized as Gaylor's common law wife to claim a share of the settlement. Her petition was denied, leading to Ranger filing a declaratory judgment against General Assurance Company, asserting that General was liable for Gaylor's damages under a policy providing spousal benefits to Rossi. The court determined that issue preclusion did not bar Ranger from re-litigating the marital status issue, as Ranger's interests conflicted with those of the County during the settlement proceeding. The County's aim was to secure the settlement, while Ranger sought to establish Rossi's marital claim to potentially shift liability to General. The court concluded that Ranger and the County were not in privity regarding the marital-status adjudication, thus the lower court's application of collateral estoppel to Ranger was erroneous. The ruling was supported by the principles established in Vaksman and Ranger. Additionally, concerning Essex's insured, Winco, the court noted conflicts of interest regarding a motion to amend the defendant's caption, highlighting that Winco had an interest in opposing one proposed amendment that would expose it to liability, while having no interest in another alternative that would not affect its liability.
Essex is required to defend and indemnify GCI, Winco's successor in interest, regardless of whether Winco or GCI is named as the defendant. Essex opposed proposed amendments because it would remain liable to defend both Winco and GCI. Even if Winco was involved in the underlying state action, it is established that Essex was not in privity with Winco for issue preclusion purposes. Maione contended that Essex was in privity with GCI due to a mutual interest but this argument was rejected. Although Essex initially retained counsel for GCI in 1999, that counsel withdrew before Maione's motion to amend was filed, and Essex later retained counsel solely to represent Winco's interests. Consequently, Essex was neither a party nor in privity with GCI, and the doctrine of issue preclusion does not apply. The district court's finding of issue preclusion prevented it from addressing whether GCI is a successor in interest to Winco under Pennsylvania law. The judgment in favor of GCI is vacated, and the case is remanded for the district court to make an independent determination regarding GCI's status as a successor in interest, allowing for the introduction of additional evidence or hearings if necessary.
On April 19, 2005, a non-jury trial was held where Wallace Slatinsky, a former executive director and shareholder of HMA, testified regarding the formation of HMA to operate Greenway Center after the Pennsylvania Department of Health revoked Winco's license. To reinstate the license, HMA was required to ensure no Winco ownership or management was involved in its operations. Baker was specifically retained to represent Winco, not Essex, which is confirmed by a letter from Baker's firm about drafting an intervention motion for Winco Acquisition.
Slatinsky explained that Winco's continued existence was necessary due to its existing service contracts with counties and insurance companies, which Greenway Center relied on. HMA and GCI opted not to renegotiate these contracts, finding it inconvenient to do so.
The legal standards for issue preclusion, as outlined in Veltri, require that the issues in both cases be identical, there must be a final judgment, the party against whom the plea is asserted was involved in the prior case, they had a fair opportunity to litigate, and the previous determination was essential to the judgment. However, the fifth requirement is not recognized under Pennsylvania law, as established in Shaffer v. Smith.
Essex's argument against GCI's status as a successor to Winco, based on a no assignment clause in the insurance policy, was rejected. The court cited a precedent stating that rights under an insurance contract are transferable to a corporate successor despite such clauses.
Maione and GCI contended that judicial estoppel should prevent Essex from denying GCI coverage, arguing that Essex's initial retention of counsel for GCI indicated coverage. However, Essex withdrew its defense upon determining that GCI was not an insured party under the policy. Judicial estoppel was deemed inapplicable because there was no evidence of bad faith on Essex's part; it acted appropriately until it confirmed GCI's lack of coverage.
