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WATSONTOWN BRICK CO. v. HERCULES POWDER CO.

January 12, 1962

WATSONTOWN BRICK COMPANY, Plaintiff,
v.
HERCULES POWDER COMPANY, Defendant



The opinion of the court was delivered by: FOLLMER

This is an action by plaintiff to recover damages alleged to have been caused by negligence on the part of defendant, Hercules Powder Company, in setting off a blast at plaintiff's quarry and manufacturing plant in Delaware Township, Northumberland County, Pennsylvania. The matter is presently before the Court on motion of defendant for an order adding necessary parties plaintiff. From the affidavits filed in connection with the pending motion it appears that Watsontown was insured by a number of insurance companies and that the said insurance companies effected settlement with Watsontown under the said policies in the aggregate sum of $ 73,096.73 representing a portion of plaintiff's claimed losses. The adjustment between Watsontown and the covering insurance companies was made by what is commonly referred to as the 'loan receipt method.' The policies do not say anything concerning adjustment by the loan receipt method and this was done as a voluntary matter between the insurance companies and the insured. Defendant has moved under Rule 21 of the Federal Rules of Civil Procedure, 28 U.S.C.A., to add the insurance companies an necessary parties plaintiff as being real parties in interest under Rule 17(a) of the Federal Rules of Civil Procedure because as partial subrogees or assignees of plaintiff they are real parties in interest under Pennsylvania law and ought to be joined under the provisions of Rule 19(b) of the Federal Rules of Civil Procedure.

No Federal right is involved in this action and so the substantive law of Pennsylvania will govern. *fn1" As to whether a real party in interest is also a necessary party and not merely a proper one is a procedural question and is governed by the Federal Rules of Civil Procedure.

 It is clear that by the substantive law of Pennsylvania the loan receipt method of settlement of claims by insurance companies is legal and binding and with no qualifications or reservations as to the type of claims involved. *fn2"

 In Arabian American Oil Company v. Kirby & Kirby, Inc., 1952, 171 Pa.Super. 23, 28, 90 A.2d 410, 412, the Court said, inter alia: 'Ever since the exhaustive opinion in Luckenbach v. W. J. McCahan Sugar Refining Co., (1918) 248 U.S. 139, 39 S. Ct. 53, 63 L. Ed. 170, the legality of such agreements cannot be questioned and they must be given effect regardless of the stipulation of any bill of lading that the carrier shall have the benefit of insurance effected by the shipper.' In further support of this proposition the Court cites The Plow City, 122 F.2d 816, 819 (3 Cir., 1941).

 Luckenbach, of course, is a landmark case. There Mr. Justice Brandeis said in part: (248 U.S. 139, 148, 39 S. Ct. 53, 55)

 Defendant contends that Luckenbach does not apply and never was intended to apply to the situation in the case at bar. I do not think that the cases support this contention. In The Plow City, supra, the Court disposed of this matter in one short paragraph, to wit: (122 F.2d 816, 818, 819)

 'The appellees urge that the libel should have been dismissed because it was not brought by the real party in interest, contending that the appellant has received payment for its losses from the underwriters, Fidelity Phoenix Fire Insurance Company. This is not the fact. The libellant's underwriter did not pay its losses within the terms of the policy, but gave the appellant the sum of $ 7,420.63 as a loan which was repayable in the event and to the extent that the appellant recovered against any third party for the damage to the goods in transit. The receipt is similar to that which the Supreme Court passed upon in the case of Luckenbach v. W. J. McCahan Sugar Refining Co., 248 U.S. 139, 39 S. Ct. 53, 63 L. Ed. 170, 1 A.L.R. 1522. See, also, Automobile Insurance Co. v. Springfield Dyeing Co., 3 Cir., 109 F.2d 533, 537. * * *'

 No exceptions or reservations to Luckenbach are there made.

 In Kooser v. West Penn Railways Co., 1941, 42 Pa.Dist. & Co. R. (Pa.) 701, the Court in approving the 'loan receipt' method of payment held that the method so used did not make the insurance company the 'real party in interest' in an action instituted by the automobile owner against the alleged wrongdoer to recover for the specified damages, and it need not therefore be joined as plaintiff in such an action under Rule 2002 of the Pennsylvania Rules of Civil Procedure. The Court said, inter alia, quoting from Ash v. Rhodes, 5 N.Y.2d 939 (City Court, Binghamton, 1938):

 "But the 'loan receipt' was devised for the very purpose of avoiding the rules of subrogation incident to cases where actual payment by the insurer to the insured has been made. And the sole question to be answered in the instant case is whether the insured and the insurer accomplished their purpose by the use of the device referred to as the 'loan receipt.' I think Justice Brandeis answered that question in the affirmative in the Luckenbach Case hereinbefore referred to." *fn3"

 In First National Bank of Ottawa v. Lloyd's of London, 1940, 7 Cir., 116 F.2d 221, 226, the Court takes notice of the broad acceptance of the loan receipt method of settlement as follows:

 'For many years it has been customary for insurers, in order to save rights of their assureds and to promptly place them in funds, so that their business might be continued without embarrassment, to lend to their assureds the amount of the loss, repayable only out of moneys collected on account of the loss. There is a line of cases approving such arrangements and holding that such loans are not a payment of insurance. (Citing Luckenbach, supra, and others).' *fn4"

 That defendant cannot be subject to financial embarrassment by this method of settlement is well shown in Braniff Airways, Inc. v. Falkingham et al., 1957, ...


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