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WHITE HALL BLDG. CORP. v. PROFEXRAY DIV. OF LITTON

November 27, 1974

WHITE HALL BUILDING CORPORATION
v.
PROFEXRAY DIVISION OF LITTON INDUSTRIES, INC. v. CENTER CITY X-RAY LAB, INC., JOHN CIONCI, OSTRANDER X-RAY SPECIALISTS, INC., PENNSYLVANIA X-RAY CORP. and HOPE X-RAY PRODUCTS, INC.



The opinion of the court was delivered by: NEWCOMER

 Newcomer, District Judge.

 Defendant Hope X-Ray Products, Inc., presently stands before this Court with a motion to join, as real parties in interest under Rule 17(a) of the Federal Rules of Civil Procedure, two insurers of plaintiff who have transferred funds to plaintiff in the form of a purported loan rather than outright payment. For the reasons set forth below, this Court has determined that it must deny this motion.

 Plaintiff commenced this action to recover the sum of Three Hundred Twenty Thousand and Forty Dollars ($320,040.) for property damage sustained at plaintiff's building located at 249 N. Broad Street, Philadelphia, Pennsylvania, when a machine manufactured by the defendant, Profexray Division of Litton Industries, Inc., malfunctioned and caught fire. Plaintiff subsequently amended the complaint to add additional claims for loss of personal property of Fifty-eight Thousand Dollars ($58,000) and loss of rental income of One Hundred Eight Thousand Dollars ($108,000). At the time of the fire in question, plaintiff carried fire insurance for its building with Potomac Insurance Company a part of General Accident Group. After the fire, Potomac and General paid plaintiff One hundred ninety-seven thousand dollars ($197,000) by way of so-called "loan receipts", by which Potomac Insurance and General Accident purported to loan plaintiff the sum of money transferred, and by which plaintiff was obligated to pay Potomac and General Accident if plaintiff recovered from another party or parties for the fire damage. This agreement also provided that as security for the loan, plaintiff pledged whatever recovery it might make against another party, and that while plaintiff was to initiate suit in its own name against the party whose negligence allegedly caused the fire, such suit was to be "at the expense of and under the exclusive direction and control of . . . the Potomac Insurance Company".

 In due course, several third party defendants were joined in this action and one of those third parties, Hope X-Ray, has filed the motion now before this Court to join Potomac and General Accident as parties plaintiff. Hope contends that because of their payments to plaintiff, Potomac and General Accident have become subrogated to plaintiff's right of recovery in the present suit, and are therefore real parties in interest under Rule 17(a) of the Federal Rules of Civil Procedure. Plaintiff, on the other hand, argues that because the above payments were made by way of the loan receipt method described above, Potomac and General Accident have not become subrogated to plaintiff's right of recovery, and are therefore not real parties in interest.

 Before proceeding to the merits of this issue, this Court would note a preliminary procedural matter which merits some attention. Defendant's motion suggests that the issue of the joinder of Potomac and General Accident turns solely on whether they qualify as real parties in interest under Rule 17(a), and some courts have in fact so treated this issue in cases similar to the one now before this Court. See City Stores Company v. Lerner Shops of District of Columbia, Inc., 133 U.S. App. D.C. 311, 410 F.2d 1010 (1969). Other courts, however, under the approach which would seem more analytically correct, hold that even if a court determines that a party is a real party in interest under Rule 17(a), the court must then decide whether such real party in interest is also a "necessary and indispensable" party under Rule 19, Federal Rules of Civil Procedure. See United States of America v. Aetna Casualty and Surety Company, 338 U.S. 366, 381-382, 94 L. Ed. 171, 70 S. Ct. 207 (1949); Watsontown Brick Company v. Hercules Powder Company, 201 F. Supp. 343, 344 (M.D. Pa. 1962).

 The above considerations are offered, however, merely as points for future reference. Although Hope has presented no motion under Rule 19, the issue of its motion is clear, namely, whether this court should in this case compel the joinder of Potomac and General Accident, and this issue deserves a decision on the merits.

 The issue presented by defendant's motion does not lend itself to an easy decision. Under the traditional test, a party is a real party in interest under Rule 17(a) if it has the legal right under the applicable substantive law to enforce the claim in question in the case. Northboro v. Wheatland Tube Company, 198 Fed. Supp. 245, 247 (E.D. Pa. 1961); 3A Moore's Federal Practice § 17.02. Since the instant case involves no federal right, the applicable substantive law is that of Pennsylvania. Under the traditional test of Rule 17(a), therefore, the issue in this case becomes whether Potomac and General Accident, having transferred funds to plaintiff under the loan receipt method described above, would have the right under Pennsylvania law to bring the action which plaintiff has currently brought.

 Not surprisingly, this Court's research reveals no Pennsylvania case on point. Under the terms of the loan receipt method of transaction, the insured rather than the insurer initiates any court action brought against a third party, and thus neither Pennsylvania's nor other courts would likely encounter the issue of whether the insurer itself could bring the action. It thus becomes necessary to attempt to ascertain what Pennsylvania's courts would do if such issue were in fact raised.

 Under Pennsylvania law, at least in the opinion of one Federal District Court, an insurance company in the position of an ordinary subrogee has the right, independent of the insured's right, to bring an action against the parties who allegedly caused the loss on which the insurer has paid. St. Paul Fire and Marine Insurance Company v. Peoples Natural Gas Company, 166 F. Supp. 11, 12 (W.D. Pa. 1958), which held that an insurance company which paid a policy holder under a fire insurance policy and was thus subrogated to the policy holder's rights had the right to bring an action in its own name against the party whose negligence allegedly caused the fire. This holding agrees with the position of the great majority of jurisdictions. 3A Moore's Federal Practice § 17.09 (2.-1).

 The problem, however, is that to the limited extent it has dealt with loan receipts, Pennsylvania law has in fact not treated an insurer who uses a loan receipt the same as an insurer who makes an outright, unconditional payment. In Arabian Oil Company v. Kirby and Kirby, Inc., 171 Pa. Sup 23, 90 A.2d 410 (1952), the leading Pennsylvania case on loan receipts, a shipper sent goods via carrier under an agreement which provided that in the event of damage to the goods, the carrier was to have the benefit of any insurance paid to the shipper, regardless of the carrier's liability for the damage. When the goods were in fact damaged, the shipper sued the carrier after the shipper's insurer had transferred funds to the shipper under the auspices of a loan receipt in an attempt to protect its subrogation interests against the carrier.

 A jury subsequently found the carrier liable, who in turn argued that the loan between the insurer and shipper was a sham, and should be applied to offset the carrier's liability pursuant to the provision in the carrier/shipper agreement. The Superior Court rejected this argument, simply citing Luckenbach v. McCahan Sugar Refining Co., 248 U.S. 139, 63 L. Ed. 170, 39 S. Ct. 53 (1918), where the Court, speaking through Justice Brandeis in a case identical to Arabian, had held the loan receipt valid under federal common law on grounds that in effect amounted to a balancing of the equities between insurer and carrier.

 Similarly, in Automobile Insurance Co. v. Springfield Dyeing Co., 109 F.2d 533 (3rd Cir. 1940), the Court of Appeals for this circuit held that a transfer of funds by an insurer under the auspices of a loan receipt did not constitute an admission of liability by the insurer. Plaintiff in that case, a bailee who had insured the goods it held, had sued its insurer on their policy when certain goods were stolen. The insurer argued that under the policy, it was liable only for loss not compensated by the bailor's insurer, and that a purported "loan" the bailor's insurer had made to the bailor should in fact be considered a payment reducing the compensation owed by the bailee's insurer. In rejecting the latter argument, and instead holding the loan receipt valid, the circuit panel relied on federal rather than Pennsylvania authority, but since the decision ...


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