USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 93-2352
IN RE SAN JUAN DUPONT PLAZA HOTEL FIRE LITIGATION.
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AMERICAN INTERNATIONAL INSURANCE COMPANY OF PUERTO RICO
and INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA,
Cross-Claimants, Appellants,
v.
AMERICAN NATIONAL FIRE INSURANCE COMPANY,
Cross-Defendant, Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Raymond L. Acosta, U.S. District Judge]
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Before
Boudin, Circuit Judge,
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Bownes, Senior Circuit Judge,
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and Stahl, Circuit Judge.
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Robert S. Frank, Jr. with whom Mark D. Cahill, Bret A. Fausett,
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Jeffrey A. Levinson, Choate, Hall & Stewart, William R. Kardaras,
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Louise A. Kelleher and Cooper, Brown, Kardaras & Scharf were on
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briefs for American International Insurance Company of Puerto
Rico and Insurance Company of the State of Pennsylvania.
Kent R. Keller with whom William A. Kurlander, John C. Holmes,
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J. Steven Bingman and Barger & Wolen were on brief for American
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National Fire Insurance Company.
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January 27, 1995
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BOUDIN, Circuit Judge. This appeal is a companion to
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Lyon v. Pacific Employees Insurance Co., Nos. 93-2115, 93-
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2116, which is decided today in a separate opinion. Here,
appellants American International Insurance Company of Puerto
Rico ("AIIC") and Insurance Company of the State of
Pennsylvania ("ISOP") challenge the district court's sua
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sponte grant of summary judgment for American National Fire
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Insurance Company ("ANFIC") on AIIC/ISOP's cross-claim for
defense costs. The appellants contend that the district
court's action in granting summary judgment sua sponte was
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procedurally flawed because they had no notice and no
opportunity to present a defense. AIIC and ISOP were the
primary general liability insurers for the Dupont Plaza and
related entities when the hotel fire occurred on December 31,
1986. Their insureds included the San Juan Dupont Plaza
Corporation, Holders Capital Corporation ("Holders"), Hotel
Systems International ("HSI"), Hotel Equipment Leasing
Associates ("HELA") and William Lyon, in his capacity as a
shareholder and director of the various Dupont Plaza
entities.1 As the primary insurers for the hotel, AIIC and
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1Holders, in which Lyon and others had an ownership
interest, was the holding company for various hotel
operations. HSI, a subsidiary of Holders, owned and operated
the Dupont Plaza. HELA is a limited partnership, in which
Lyon was a limited partner, that leased hotel equipment to
various hotels including the Dupont Plaza.
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ISOP financed the hotel's defense of the massive fire
litigation, expending over $40,000,000 in defense costs.
At the time of the fire, ANFIC was the primary general
liability insurer for the William Lyon Company, a California
residential construction and development company, and related
entities, including William Lyon individually. As Lyon
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explains in detail, Pacific Employers Insurance Company
("PEIC") and First State Insurance Company ("FSIC") were
among several excess insurers for the William Lyon Company
and its related insureds at the time of the fire, and their
coverage provided additional layers of protection over and
above ANFIC's primary coverage.
In general, as is typical in excess insurance cases,
PEIC and FSIC provided coverage similar to ANFIC's primary
coverage. Like the PEIC and FSIC policies, the ANFIC
policy's only direct link to the Dupont Plaza was Lyon's
status as a named individual insured; no Dupont Plaza entity
was listed as an insured, and no listed insured other than
Lyon was involved in the hotel business. In addition, like
the PEIC and FSIC policies, the ANFIC policy limited Lyon's
individual coverage to the conduct of businesses of which he
was the "sole proprietor."
Soon after the fire-injury suits began, Lyon and Holders
tendered their defenses to ANFIC. ANFIC agreed to defend
Lyon, but reserved its rights to deny coverage on the ground
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that Lyon had not been sued in an insured capacity. ANFIC
declined to defend Holders on the basis that it was not an
insured. In April 1988, ANFIC filed a declaratory judgment
action in a California federal court against Lyon and others
to resolve the coverage issues. This action was subsequently
consolidated with the multi-district litigation in Puerto
Rico and eventually dismissed without prejudice.
AIIC, ISOP and ANFIC were all eventually joined as
defendants in the first phase of the fire-injury litigation--
AIIC and ISOP in September 1987 and ANFIC in January 1989.
In February 1989, AIIC and ISOP filed a cross-claim against
ANFIC, seeking contribution for their costs for defending
Lyon and the other Dupont Plaza entities related to him. In
May 1989, when phase I was resolved by settlement, AIIC, ISOP
and ANFIC all contributed their coverage limits as damages to
the victims' settlement fund--a combined $1 million for AIIC
and ISOP and $1 million for ANFIC--with ANFIC expressly
reserving its rights later to dispute its obligation to
contribute to defense costs.
In phase III of the litigation, the district court
undertook the unenviable task of sorting out the contractual
liabilities of the various insurers. On December 7, 1992, in
Order No. 469, the district court ruled that the PEIC and
FSIC policies did not cover the fire-related obligations of
Lyon or any of the Dupont Plaza entities connected to him, a
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result that we have today affirmed in Lyon. Since its policy
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largely paralleled the PEIC and FSIC policies, ANFIC was
encouraged by Order No. 469 to move for summary judgment on
AIIC/ISOP's cross-claim for defense costs.
Because the district court's deadline for the filing of
pre-trial motions had long since passed, ANFIC was first
required to obtain the court's permission to file the motion
out of time. On February 25, 1993, ANFIC filed a twelve-page
motion seeking leave to file for summary judgment,
predicating its request on the identity of the issues decided
in Order No. 469. The motion outlined the substance of
ANFIC's proposed summary judgment arguments and presented
procedural arguments why the court should allow the belated
summary judgment filing. ANFIC also requested that the court
establish an appropriate briefing schedule for summary
judgment filings.
On March 9, 1993, AIIC and ISOP filed a seven-page
opposition to ANFIC's motion for leave, setting forth both
procedural and substantive grounds for denial. The
opposition briefly urged differences between a primary
insurer's defense obligation and an excess insurer's coverage
obligation, hoping to distinguish AIIC/ISOP's contribution
claim against ANFIC from the liability coverage claims
asserted by Holders and Lyon against PEIC and FSIC. The
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opposition did not contain any analysis or discussion of
California law on the duty to defend.
In the event the court granted ANFIC's motion for leave
to file, AIIC and ISOP requested similar permission to file a
cross-motion for summary judgment to affirm ANFIC's duty to
contribute to Lyon's defense. AIIC and ISOP also filed a
motion seeking production of ANFIC's underwriting files,
claiming that those files contained admissions relating to
ANFIC's obligation to defend Lyon. Although the motion did
not identify the supposed admissions, on appeal AIIC and ISOP
suggest only that the files might help establish that ANFIC
was responsible for including an allegedly ambiguous omnibus
clause in its policy.
On September 2, 1993, the district court entered Order
No. 495, granting summary judgment for ANFIC on AIIC/ISOP's
cross-claim for defense costs. Treating ANFIC's motion for
leave to file as a request for summary judgment, the district
court ruled that ANFIC's primary policy, like the parallel
PEIC and FSIC policies, did not cover Lyon or any of the
Dupont Plaza entities. Because AIIC/ISOP's cross-claim was
"distinct and separate from any remaining claims" in the fire
litigation, the court entered Final Judgment No. 12
dismissing the cross-claim in its entirety. The court also
dismissed AIIC/ISOP's request for production of documents as
moot. On October 8, 1993, in Order No. 506, the court denied
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AIIC/ISOP's timely motion to reconsider, and this appeal
followed.
As a preliminary matter, ANFIC argues that this appeal
is limited to a review of Order No. 506, which is the
district court's denial of the motion for reconsideration,
and that our inquiry is therefore for abuse of discretion
only. See, e.g., Mariani-Giron v. Acevedo-Ruiz, 945 F.2d 1,
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3 (1st Cir. 1991). ANFIC points to the fact that appellants'
notice of appeal is entitled, "Notice of Appeal to the First
Circuit Court of Appeals From Order No. 506 of District Court
Judge Raymond L. Acosta Dated October 8, 1993." AIIC and
ISOP contend Order No. 495, the district court's summary
judgment ruling, is also before this court.
An appeal from the denial of a motion for
reconsideration is not an appeal from the underlying
judgment. LeBlanc v. Great American Ins. Co., 6 F.3d 836,
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839 (1st Cir. 1993), cert. denied, 114 S. Ct. 1398 (1994)
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(collecting cases). But we have allowed "a timely appeal
from the denial of a timely Rule 59(e) motion to serve as
notice of an appeal from the underlying judgment in cases
where the appellant's intent to appeal from the judgment is
clear." Id. A mistake in designating a judgment in the
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notice of appeal will not ordinarily result in a loss of the
appeal "as long as the intent to appeal from a specific
judgment can be fairly inferred from the notice, and appellee
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is not misled by the mistake." Kelly v. United States, 789
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F.2d 94, 96 n.3 (1st Cir. 1990).
AIIC/ISOP's notice of appeal manifests AIIC/ISOP's
intent to appeal the summary judgment ruling. The body of
the notice referred to Order No. 469 and Final Judgment No.
12. The notice, filed on November 1, 1993, following the
district court's denial of the motion to reconsider on
October 8, 1993, was timely for an appeal of Order No. 469
and Final Judgment No. 12. See Fed. R. App. 4(a). The title
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of the notice, which refers only to the motion to reconsider,
is not dispositive, and there is no claim that ANFIC was
prejudiced in any way by the mislabeled notice. See Kotler
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v. American Tobacco Co., 981 F.2d 7, 11-12 (1st Cir. 1992).
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We turn now to the district court's decision to grant
summary judgment in favor of ANFIC. When the district court
granted summary judgment, there was no formal motion for
summary judgment pending before it; it had only the ANFIC's
motion requesting leave to file and the AIIC/ISOP's
opposition. These filings did outline the substance of the
parties' respective positions on the merits. Still, in
formal terms, the district court's ruling was "the functional
equivalent of a sua sponte grant of summary judgment."
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Stella v. Town of Tewksbury, 4 F.3d 53, 55 (1st Cir. 1993).
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In Stella, we recognized that a district court can grant
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summary judgment on its own initiative so long as the
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parties' procedural interests are protected. 4 F.3d at 55.
In particular, discovery must be far enough examined to let
the court accurately decide whether there are genuine issues
of material fact and to make the parties aware of the
evidence that they can adduce. Id. Further, the litigants
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need notice from the district court of its intention to
consider a grant of summary judgment, so that the litigants
can present their arguments and their evidence. Id.
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In this case, there was on the one hand no notice that
the district court was considering a grant of summary
judgment, for the only issue pending was whether the court
would grant permission to file such a motion. On the other
hand, the parties in the course of presenting their positions
on the latter issue also revealed much of what they had to
say on the substance of the merits of summary judgment. The
matter is further complicated because AIIC/ISOP also took the
position that, before responding to a summary judgment
motion, they needed additional discovery in order to
illuminate the question who drafted the omnibus clause in the
ANFIC policy.
If we were completely certain that the merits of the
summary judgment issue had been fully presented to the
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district court, it might be reasonable to conclude either
that the essence of the Stella notice requirement had been
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satisfied or that the failure to satisfy it was harmless.
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See Stella, 4 F.3d at 56 n.4. Further, our own opinion today
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in the companion case significantly limits the arguments left
open to AIIC/ISOP and also appears to render its discovery
request irrelevant. But there does remain unresolved a
significant legal issue, not squarely addressed by the
district court, so we are persuaded that a remand is the most
appropriate solution.
Broadly speaking, as to coverage for liability, ANFIC's
position appears to be materially identical to that of PEIC
and FSIC decided in the companion Lyon case. The reasons we
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have given in that case for exculpating PEIC and FSIC make
clear that claims of liability coverage by Lyon or Holders
against ANFIC would also fail. The sole proprietor
endorsement appears in the ANFIC policy, and we have held in
Lyon that this endorsement limits claims under the omnibus
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clause without regard to who drafted the provisions. Yet,
there is a further argument, vigorously pressed by AIIC/ISOP,
that the duty to defend under California law is broader than
the duty to indemnify and applies wherever a liability
coverage claim has "potential" validity even though it
ultimately fails.
There is apparently no dispute that under California law
the duty to defend is broader than the duty to indemnify.
Horace Mann Ins. Co. v. Barbara B., 846 P.2d 792, 795 (Cal.
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1993). AIIC/ISOP say that wherever there is potential
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coverage under a policy--by potential they appear to mean
"arguable"--the duty to defend exists. All parties also seem
to assume that, if there was a duty on the part of ANFIC to
defend at the outset, then it is liable for contribution to
the defense costs even if the potential claim of liability
coverage is later resolved in the negative. Montrose Chem.
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Corp. of Cal. v. Superior Court, 861 P.2d 1153, 1157 (Cal.
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1973); Continental Casualty Co. v. Zurich Ins. Co., 366 P.2d
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455, 461 (Cal. 1961).
ANFIC, however, says that the duty to defend in arguable
cases does not extend to those in which the dispute is about
whether the putative insured is actually insured under the
policy; and ANFIC cites California cases that it thinks
support its position. Wint v. Fidelity & Cas. Co., 507 P.2d
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1383, 1388 (Cal. 1973); McLaughlin v. National Union Fire
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Ins. Co. of Pittsburgh, Pa., 29 Cal. Rptr. 2d 559, 570 (Cal.
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Ct. App. 1994). ANFIC also seems to think that it matters
that (in its view) the burden of proof to establish that an
individual or company is protected by a policy is upon the
claimant, whereas proving that a restriction or exclusion
applies is upon the insurer.
We are doubtful whether this supposed difference in
burden of proof matters in a case in which the facts are not
in dispute, but the extent of the duty to defend under
California law may be a debatable point. While law on the
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duty to defend in potential coverage cases might be limited
in the fashion that ANFIC suggests, it is also possible that
the duty to defend exists in any case in which there is
arguably coverage, regardless of what policy language is in
dispute. In the alternative, perhaps the duty to defend
exists at least where the defendant in the underlying
liability litigation is a named insured, and the dispute as
to coverage turns on whether the insured is sued in a covered
"capacity."
Assuming there is a duty to defend in arguable cases and
that ANFIC's distinction between types of disputes does not
wash, the question would remain whether coverage here was
arguable. While our reading of the policy language in Lyon
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may somewhat impair AIIC/ISOP's position, nevertheless under
California law the duty to defend is evaluated in terms of
likelihoods at the outset of litigation. See, e.g., Horace
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Mann, 846 P.2d at 795. A court's later conclusion that a
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provision should be read one way, and that extrinsic evidence
is beside the point, does not necessarily mean that the
contrary view was inarguable. The standard of what is
arguable is itself a matter of California law.
Although the issues as we have posed them are
essentially legal ones, there are numerous reasons why a
remand is appropriate so the district court can consider the
matter in the first instance. Discovery aside, it is not
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completely clear that the parties have said everything they
can about the "merits," since much of the briefing in this
court has been directed to the procedural propriety of
summary judgment and not to the merits. Since the reach of
California law on the duty to defend is disputed, our concern
that the parties may not have mustered all of their merits
arguments and citations is not a formality.
Further, we are not wholly certain that our narrowing of
the issues is justified. Although our companion opinion in
Lyon probably eliminates any basis for concern about who
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drafted the omnibus clause in the ANFIC policy, none of the
litigants has had an opportunity to address this issue in
light of Lyon. Similarly, we are skeptical that ANFIC's
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willingness to assume Lyon's defense in the underlying
litigation is much of an admission vis-a-vis the AIIC/ISOP
claim; as ANFIC points out, it could be subject to harsh
penalties under California law if it breached the duty to
defend. Still, the presence of this kind of dangling dispute
shows why the wiser course is to remand.
Finally, although we are reluctant to prolong what has
been extraordinarily burdensome litigation, no judge on this
panel compares to the presiding district judge in his
familiarity with the facts, the procedural history, and the
possible ramifications of California law in relation to the
dispute. The district court did not in its grant of summary
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judgment discuss the asserted distinctions between the duty
to indemnify and a duty to defend or their connection to the
claims of contribution pressed by AIIC/ISOP in this case.
This is one more reason why a remand is the wiser outcome.
On remand, we think that the proper course would be for
the district court to invite ANFIC to file a formal motion
for summary judgment and to allow AIIC/ISOP to file papers in
opposition, or a cross-motion in their own favor, or both.
If any party wishes to claim that additional discovery is
necessary, it is free to do so. As already noted, we have
not discerned any obvious factual issues requiring further
discovery but the district court is free to determine
otherwise after the parties have had an opportunity to
present their positions.
The judgment is vacated and the case remanded for
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further proceedings in accordance with this opinion.
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