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Provident Tradesmens Bank and Trust Co. v. Lumbermens Mutual Casualty Co.

decided: August 30, 1966.


Reargued June 9, 1966.

Kalodner, Ganey and Freedman, Circuit Judges. Reargued before Staley, Chief Judge, and McLaughlin, Kalodner, Hastie, Ganey, Smith and Freedman, Circuit Judges. Freedman, Circuit Judge (dissenting).

Author: Kalodner

KALODNER, Circuit Judge.

The instant declaratory judgment proceeding*fn1 was brought by Lynch's Estate*fn2 to determine whether the coverage of a public liability policy issued by the defendant, Lumbermens Mutual Casualty Company, to an owner of an automobile, one Edward S. Dutcher, extended to the deceased Donald Cionci, who was driving the car at the time it was involved in an accident. The policy by its terms extended its coverage to any person operating Dutcher's automobile with his permission at the time of the accident. The critical fact issue to be determined in the declaratory judgment action was whether the automobile was being operated by Cionci within the scope of the permission granted to him by Dutcher when it collided with a truck driven by one Thomas W. Smith. Smith, Cionci and John R. Lynch, who was riding with Cionci, were killed; John Landis Harris, who was also a passenger in the Cionci car, was injured.

Lynch's estate sued Cionci's estate in the District Court for the Eastern District of Pennsylvania in Civil Action No. 25149, seeking damages under the Pennsylvania Wrongful Death and Survival Statutes.*fn3 The defendant insurance company refused to defend Cionci's estate on the ground that Cionci had deviated beyond the use authorized by Dutcher, viz., to drive from Bryn Mawr to Ardmore, some two miles southeast, provided he return in half an hour, whereas Cionci had instead driven some twelve miles in an opposite direction to Media. Lynch's estate obtained a default judgment against the Cionci estate and then brought this declaratory judgment action against the insurance company. Damages allowed on the judgment were subsequently fixed at $50,000.

Smith's estate, which had brought suit against Dutcher and the Cionci and Lynch estates, in the Common Pleas Court of Delaware County, Pennsylvania, and Harris who had sued all three in the Delaware County Court, were joined as parties in the instant declaratory judgment action on Lumbermens' motion. Dutcher was not joined.

At the trial in the instant declaratory judgment action, the District Court ruled that Dutcher was incompetent to testify with reference to the scope of permission granted to use his car, under the Pennsylvania Dead Man's Act, 28 P.S. § 322, as far as the Lynch and Smith estates were concerned, on the ground that his interest was adverse to that of the two estates because the coverage of the policy was limited and he had an interest in maintaining its coverage for his own protection in view of the pending actions against him in the state court. The District Court then directed verdicts in favor of the Cionci and Lynch estates since no evidence had been introduced to rebut the Pennsylvania presumption that a dead man operates a borrowed automobile within the scope of his permissive use. Dutcher was, however, permitted to testify in the Harris phase of the trial, and the jury found that Cionci had not deviated from his permitted use of the automobile.

Pursuant to the verdicts stated the District Court entered a judgment declaring that "Donald Cionci was driving the motor vehicle owned by Edward S. Dutcher and insured by the Lumbermens Mutual Casualty Company under its policy * * * with the permission of Edward S. Dutcher * * *" and that Cionci "was an insured as defined in the policy".

On this appeal, Lumbermens contends that the trial judge erred (1) in ruling that Dutcher was incompetent under the Pennsylvania Dead Man's Act as a witness against the Cionci and Lynch estates and in directing verdicts in favor of the Lynch and Smith estates; (2) in its instructions on the score of deviation in the Harris phase of the trial, and (3) "that it was impossible for the jury to consider the Harris case impartially when it had been directed to find against Lumbermens in the Lynch and Cionci cases."

We do not reach the contentions stated because in our view we are required to vacate the Judgment of the District Court and remand with directions to dismiss the instant action for these reasons:

First, there was a failure to join an indispensable party to this action, Dutcher, the named insured in Lumbermens' policy;

Second, the District Court erred in that in the appropriate exercise of its discretion it should have denied relief without consideration of the merits in view of the fact that two pending actions in a state court, earlier referred to, in which the here absent Dutcher, as well as the Cionci, Lynch and Smith estates, and Harris, were parties, presented the critical mooted question as to the coverage of Lumbermens' policy at issue in the instant declaratory judgment action.

It must immediately be noted that the issue as to whether there was a failure to join an indispensable party to the action -- Dutcher -- was not presented by Lumbermens to the District Court, nor did Lumbermens urge the District Court to deny relief in the appropriate exercise of its discretion for the reasons we have stated.

First, as to the indispensable party issue:

Lumbermens' policy was one of finite limits, undisclosed in the record as a result of the District Court's pretrial ruling.

The District Court specifically held that the circumstance that the policy was one of finite limits made Dutcher's "interest" in the policy "adverse" to that of the plaintiff Lynch and Smith estates. It did so, in ruling that Dutcher was "incompetent" to testify for that reason under the Pennsylvania Dead Man's Act insofar as the two estates were concerned. What the District Court held in that context is, of course, relevant in determining whether Dutcher was an indispensable party to the action under the indispensable party doctrine.

In its Opinion discussing its "incompetency" ruling the District Court said:

" The subject matter of this suit is the coverage of Lumbermens' policy issued to Dutcher. Depending upon the outcome of this trial, Dutcher may have the policy all to himself or he may have to share its coverage with the Cionci Estate, thereby extending the availability of the proceeds of the policy to satisfy verdicts and judgments in favor of the two Estate plaintiffs. Sharing the coverage of a policy of insurance with finite limits with another, and thereby making that policy available to claimants against that other person is immediately worth less than having the coverage of such policy available to Dutcher alone. By the outcome in the instant case, to the extent that the two Estate plaintiffs will have the proceeds of the policy available to them in their claims against Cionci's estate, Dutcher will lose a measure of protection. Conversely, to the extent that the proceeds of this policy are not available to the two Estate plaintiffs Dutcher will gain. * * * It is sufficient for the purpose of determining adversity [of interest] that it appears clearly that the measure of Dutcher's protection under this policy of insurance is dependent upon the outcome of this suit. That being so, Dutcher's interest in these proceedings is adverse to the interest of the two Estate plaintiffs, the parties who represent, on this record, the interests of the deceased persons in the matter in controversy." (Emphasis supplied.) 218 F. Supp. 802, 805-806 (E.D.Pa.1963).

It has been settled for more than a century and a half that a party is indispensable when his rights may be affected and that a court "cannot proceed to a final decision of the cause" until he is made a party. Russell v. Clark's Executors, 11 U.S. 69, 7 Cranch 69, 98, 3 L. Ed. 271 (1812).

The indispensable party doctrine is not procedural. It declares substantive law and accords a substantive right to a person to be joined as a party to an action when his interests or rights may be affected by its outcome. The indispensable party doctrine is beyond the reach of, and not affected by, Rule 19 of the Federal Rules of Civil Procedure, since the Rules, as later developed, cannot "abridge, enlarge or modify any substantive right ". 28 U.S.C.A. § 2072 (emphasis supplied).

Time and again, in cases later discussed, federal courts have held that Rule 19 does not apply to the indispensable party doctrine. Indeed, as subsequently developed, Rule 19 specifically excludes from its sweep "indispensable parties", and Rule 12(b) in terms provides for dismissal of an action for "failure to join an indispensable party".

There is no precedent which affords nourishment to a contention that the indispensable party doctrine is nothing more than a procedural rule within the ambit of Rule 19.

It is true that several text writers have summarily treated the indispensable party doctrine as a procedural rule without considering whether it attains the proportion of substantive law. The existence of the threshold question as to whether the indispensable party doctrine is one of substantive law was, however, recently noted by Howard P. Fink, Research Associate, Yale Law School, in his article on "Indispensable Parties and the Proposed Amendment to Federal Rule 19."*fn4

Exhaustive research has failed to yield a case in which the precise issue as to whether the indispensable party doctrine is one of substantive law has been raised or decided. However, Chief Judge Aldrich of the First Circuit in a recent case*fn5 noted " the view that what are indispensable parties is a matter of substance, not of procedure." (Emphasis supplied.)

Our view that the indispensable party doctrine is substantive law, according a substantive right to an absent party to be joined when his interests may be "affected by the decree", is premised on Russell v. Clark's Executors, supra, and the cases which declared the doctrine to be a "settled rule of equity jurisprudence", and the absence of an affected party as "fatal error", which must be recognized sua sponte by a trial court.

In Mallow v. Hinde, 25 U.S. 193, 12 Wheat. 193, 6 L. Ed. 599 (1827), which distinguished and limited to its facts, Elmendorf v. Taylor, 23 U.S. 152, 10 Wheat. 152, 6 L. Ed. 289 (1825), the Court in holding absent parties indispensable, said at page 198:

"In this case, the complainants have no rights separable from, and independent of, the rights of persons not made parties. The rights of those not before the court lie at the very foundation of the claim of right by the plaintiffs, and a final decision cannot be made between the parties litigant without directly affecting and prejudicing the rights of others not made parties." (Emphasis supplied)

"We do not put this case upon the ground of jurisdiction, but upon a much broader ground. * * * We put it on the ground that no court can adjudicate directly upon a person's right, without the party being either actually or constructively before the Court." (Emphasis supplied.)

In 1853, in Northern Indiana Railroad Company v. Michigan Central Railroad Company, 56 U.S. 233, 15 How. Pr. 233, 246, 14 L. Ed. 674, the Court, upon its finding that "It is impossible to grant the relief prayed, without deeply affecting the New Albany Company [which had not been joined]," declared:

"* * * in a case like the present, where a court cannot but see that the interest of the New Albany Company must be vitally affected, if the relief prayed by the complainants be given, the court must refuse to exercise jurisdiction in the case, or become the instrument of injustice." (Emphasis supplied.)

In 1854, this classic definition of an indispensable party was enunciated in the landmark case of Shields v. Barrow, 58 U.S. 130, 17 How. 130, at page 139, 15 L. Ed. 158:

"Persons who not only have an interest in the controversy, but an interest of such a nature that a final decree cannot be made without either affecting that interest, or leaving the controversy in such a condition that its final termination may be wholly inconsistent with equity and good conscience." (Emphasis supplied.)*fn6

In 1870, it was ruled, in Hoe v. Wilson, 76 U.S. 501, 9 Wall. 501, 19 L. Ed. 762, that a court must sua sponte invoke the indispensable party issue even though it was not raised by a party.

There the Court said, at page 504:

"No relief can be given in the case before us which will not seriously and permanently affect their rights and interests. According to the settled rules of equity jurisprudence, the case cannot proceed without their presence before the court. The objection was not taken by the defendant, but the court should, sua sponte, have caused the bill to be properly amended, or have dismissed it, if the amendment were not made." (Emphasis supplied.)

In 1874, the indispensable party doctrine was admirably epitomized in Williams v. Bankhead, 86 U.S. 563, 19 Wall. 563, 22 L. Ed. 184, in this statement (p. 571):

"Where a person will be directly affected by a decree, he is an indispensable party. * * *"

In the oft-quoted State of Washington v. United States, 87 F.2d 421 (9 Cir. 1936), there was enunciated what has now become landmark criteria in testing whether a party is indispensable, after it has been determined that he is interested.

The four-fold criteria there stated, at pages 427, 428, follows:

"(1) Is the interest of the absent party distinct and severable?

"(2) In the absence of such party, can the court render justice between the parties before it?

"(3) Will the decree made, in the absence of such party, have no injurious effect on the interest of such absent party?

"(4) Will the final determination, in the absence of such party, be consistent with equity and good conscience?

"If, after the court determines that an absent party is interested in the controversy, it finds that all of the four questions outlined above are answered in the affirmative with respect to the absent party's interest, then such absent party is a necessary party. However, if any one of the four questions is answered in the negative, then the absent party is indispensable." (Emphasis supplied.)

It is important to note, that in its discussion of the indispensable party question, the Court said, at pages 427, 428:

"In cases where there is error in nonjoinder of parties, either necessary or indispensable, the courts have fallen into common error by designating the error as 'jurisdictional'. The defect is not, properly speaking, a jurisdictional one * * *.

"The nonjoinder of an indispensable party is fatal error, and the court cannot proceed to a decree in the absence of such indispensable party, notwithstanding the fact that the joinder would oust the court of jurisdiction. Neither the statute [Act of March 3, 1911, ch. 231 § 50, 36 Stat. 1101] nor the equity rule [Rule 39 of the Equity Rules of 1912, 28 U.S.C.A. following section 723], * * * permit the court to proceed in the absence of an indispensable party." (Emphasis supplied.)

The indispensable party doctrine as declared in Shields and State of Washington was applied in Commonwealth Trust Company of Pittsburg v. Smith, 266 U.S. 152, 45 S. Ct. 26, 69 L. Ed. 219 (1924) and Niles-Bement-Pond Company v. Iron Moulders' Union Local No. 68, 254 U.S. 77, 41 S. Ct. 39, 65 L. Ed. 145 (1920).

This court has time and again likewise done so.

In Samuel Goldwyn, Inc. v. United Artists Corporation, 113 F.2d 703 (1940), we held that an absent party is indispensable if his interest is "joint" with that of either plaintiff or defendant, and that the doctrine applies to declaratory judgment actions.

In Baird v. Peoples Bank & Trust Co. of Westfield, 120 F.2d 1001, 136 A.L.R. 693 (1941), we specifically held, citing Shields and State of Washington, that an absent party is indispensable, "if the decree will have an injurious effect upon his interest." We there affirmed the District Court's dismissal of a complaint in an action brought by life tenants insofar as it related to the corpus of a trust fund, for failure to join remaindermen who were found to be indispensable parties.

In United States v. Washington Institute of Technology, Inc., 138 F.2d 25 1943), in affirming the District Court's dismissal of an action for nonjoinder of an indispensable party, we ruled that the requirement in Rule 19(a) that those who have a "joint interest" must be joined referred to parties who were "indispensable" prior to the Rule.

In doing so we said at pages 25-26:

"Rule 19(a) of the Rules of Civil Procedure, 28 U.S.C.A. following section 723c, requires that those having 'a joint interest shall be made parties * * *.' This means those who were indispensable parties prior to the rules. 2 Moore's Federal Practice (1938) § 19.02. As described in the leading case upon the matter, they were persons who had such an interest that any final decree rendered had to affect that interest. Shields v. Barrow, 1854, 58 U.S. 130, 17 How. Pr. 130, 15 L. Ed. 158." (Emphasis supplied.)

In Chidester v. City of Newark, 162 F.2d 598 (1947), we again declared (p. 600):

"* * * indispensable parties under Rule 19 are those who were indispensable prior to the rules ; they have such an interest in the controversy that a final decree cannot be made without either affecting their interests or leaving the controversy in such a condition that a final determination may be wholly inconsistent with equity and good conscience." (Emphasis supplied.)

And, in Hook v. Hook & Ackerman, 187 F.2d 52 (1951), we stated in note 7, page 60:

"Rule 19(a) uses the term 'joint interest', stating that those having such an interest 'must' be joined. This provision applies to parties who were indispensable under the previous practice." (Emphasis supplied.)

The courts of appeals in other circuits have in recent years attested to the continuing unimpaired vitality of the indispensable party doctrine as declared in Shields and the Supreme Court cases which preceded and followed it.

In 1964, the First Circuit, in Stevens v. Loomis, 334 F.2d 775, declared (p. 777): " where the interests of the absent party are inextricably tied in to the cause " he is a " true indispensable party " and "A court cannot proceed in the ...

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