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UNITED STATES FID. & GUAR. CO. v. KORMAN CORP.

June 14, 1988

United States Fidelity & Guaranty Company
v.
The Korman Corporation, National Union Fire Insurance Company, Cigna Property and Casualty Insurance Company, David J. Smalls and Virginia L. Smalls, et al.



The opinion of the court was delivered by: VANARTSDALEN

 DONALD W. VANARTSDALEN, SENIOR UNITED STATES DISTRICT JUDGE.

 United States Fidelity & Guaranty Company (USF&G) brought this declaratory judgment action to obtain a ruling whether it and two other insurance companies, CIGNA Property and Casualty Insurance Company (Cigna) *fn1" and National Union Fire Insurance Company (National Union), must provide The Korman Corporation (Korman) with coverage for claims against Korman in two underlying lawsuits currently pending in the Philadelphia Court of Common Pleas. The two underlying lawsuits are captioned Smalls, et al. v. The Korman Corporation, et al., April Term, 1985, No. 633 (Smalls I), and Smalls, et al. v. The Korman Corporation, et al., January Term, 1986, No. 781 (Smalls II). *fn2" Cigna, National Union, and Korman all asserted counterclaims against USF&G and cross-claims against each other seeking a declaration of their respective rights and obligations under the relevant policies. USF&G, Cigna, National Union, and Korman have all moved for judgment on the pleadings.

 The plaintiffs in Smalls I and Smalls II are residents of a tract of land situated adjacent to the Clearview Landfill in Philadelphia, Pennsylvania (the landfill). The landfill allegedly accepted hazardous waste from 1956 through 1984. The Smalls plaintiffs allege that hazardous waste has been released into the soil, surface waters, and ground waters in the landfill's vicinity and that smoke, noxious odors, and gases have been released into the atmosphere. The Smalls plaintiffs allege that, as a result, among other things, their homes have a reduced economic value.

 All but one of the Smalls plaintiffs (Gene Kahaulelio, identified in the complaint as a "Class IV plaintiff") have claims against Korman. From 1973 through 1977, Korman and its joint venturers (the Korman group) bought tracts of land adjacent to the landfill, subdivided these tracts, and developed them for the construction and sale of residential properties. The Korman group named the development, which included over 200 new homes, "New Philadelphia." Those plaintiffs with claims against Korman either bought their homes during 1974 through 1984 directly from Korman (Class I) or bought their homes during 1977 through 1984 from a private seller who bought from Korman (Class II) or leased their homes beginning in 1981 or 1984 from Korman (Class III). Classes I, II, and III have claims against Korman for fraud (Count Seven). Classes I and III have claims against Korman for breach of contract (Count Nine) in addition to the fraud claims.

 The fraud claims against Korman are set out in Count Seven of both of the Smalls complaints. The Smalls plaintiffs allege that the Korman group knew, yet failed to disclose to the plaintiffs, that the "New Philadelphia" homes were constructed on or adjacent to a landfill that had illegally served as a site for the disposal of hazardous and toxic wastes that were or could be leaching from the landfill into ground and surface waters on or adjacent to the development. Also, according to the Smalls plaintiffs, the Korman group knew and failed to disclose that the actual market values of the homes were significantly less than the sales prices offered by the Korman group because of the development's location adjacent to the landfill and that the landfill posed a substantial health and safety danger to the occupants of the homes. Further, the Smalls plaintiffs allege that the Korman group intentionally or in a reckless disregard for the truth misrepresented that the plaintiffs could rely on the sound reputation of Korman and that the homes were in a safe and desirable area, were well-suited for raising young children, would appreciate in value faster than typical homes, were a wise investment, were offered at a fair price, and represented a good, honest value.

 The Class I and III plaintiffs allege that, in completing their transactions with the Korman group, they relied on the Korman group and that the Korman group either failed to disclose or misrepresented facts that were basic to the transactions. Accordingly, the Class I plaintiffs seek damages for the difference between the actual fair market value of their homes and the value the homes would have had absent the problems caused by the landfill. The Class III plaintiffs seek damages for the difference between the rents they paid and the fair rental value of their homes and for reimbursement of their deposits. Also, the Class I and III plaintiffs seek damages for the costs of medical monitoring and for their emotional distress, inconvenience, and inability to enjoy the use of their land.

 The Class II plaintiffs allege that the Korman group was aware that the New Philadelphia homes that it sold would inevitably be resold to persons of the Class II category and that the Korman group was under a public duty to disclose the facts concerning the landfill. The Class II plaintiffs further allege that it was foreseeable that persons such as the Class II plaintiffs would rely on the Korman group's misrepresentations and nondisclosures to the original purchasers and that, in fact, the Class II plaintiffs did so rely. Also, the Korman group allegedly made false representations directly to Class II plaintiffs. Accordingly, the Class II plaintiffs seek the same damages sought by the Class I plaintiffs plus punitive damages.

 The breach of contract claims against Korman are set out in Count Nine of both of the Smalls complaints. The Class I and III plaintiffs allege that, pursuant to their contracts with the Korman group, the Korman group impliedly warranted that the New Philadelphia homes were habitable, fit, and desirable for residential use. Utilizing the same language as that contained in the fraud claims, the Class I and III plaintiffs allege breach of express and implied warranties as to safety, suitability and value.

 The Korman group allegedly breached these implied and express warranties in that the homes were built on an illegal landfill which

 
(i) gave off noxious odors, gases, and fumes; (ii) were infested with rodents and other pests; (iii) contained residue of solid and hazardous waste which were leaching into ground and surface waters adjacent to the landfill; [and] (iv) posed a danger to the health and safety of the occupants of these homes . . . [and in that the homes] (i) were not in a safe or desirable area; (ii) were not good family dwellings well suited for raising young children; (iii) did not appreciate in value at all, but rather depreciated in value relative to other homes; (iv) did not represent a wise investment; (v) were not offered at a fair price; (vi) did not represent a good, honest value; (vii) did not indicate that the Class I and Class III plaintiffs were wise to rely on the sound reputation of Korman Corporation.

 Accordingly, under their breach of contract theory, the Class I plaintiffs seek damages for the difference between the current fair market value and the value the homes would have had absent the problems caused by the landfill. The Class III plaintiffs seek damages for the difference between the rental prices they paid and the fair rental values and for reimbursement of their deposits. Also, the Class I and III plaintiffs seek damages for their medical monitoring and their inconvenience and inability to enjoy the use of their land.

 At the outset, this court's subject matter jurisdiction over this action must be addressed. In its amended complaint, USF&G asserts that this court has diversity jurisdiction pursuant to 28 U.S.C. § 1332 in that the amount in controversy exceeds ten thousand dollars and that there is complete diversity. As USF&G aligned the parties, there is complete diversity. Plaintiff USF&G is incorporated in Maryland with its principal place of business in Maryland. Defendant National Union is incorporated in Pennsylvania with its principal place of business in Pennsylvania. Defendant Cigna is incorporated in Connecticut with its principal place of business in Pennsylvania. Defendant Korman is incorporated in Pennsylvania with its principal place of business in Pennsylvania. The named individual defendants *fn3" are all citizens of Pennsylvania except one who is a citizen of Georgia.

 Korman contends, however, that Cigna and National Union should be realigned as plaintiffs, which would destroy complete diversity. Although it may destroy complete diversity, realignment is proper when there is no actual, substantial controversy between parties on one side of the dispute and their opponents. American Motorists Insurance Co. v. Trane Co., 657 F.2d 146, 149 (7th Cir. 1981) (citing Indianapolis v. Chase National Bank, 314 U.S. 63, 69, 86 L. Ed. 47, 62 S. Ct. 15 (1941)).

 In this case, realignment is not necessary because there is an actual, substantial controversy between plaintiff USF&G and defendants Cigna and National Union. To be sure, on this motion, the insurers all make similar arguments concerning the absence of any coverage and share an interest in a finding that none of the insurers owe coverage. However, assuming a finding that at least one insurer owes coverage, the insurers' interests collide on the issue of which and how many insurers owe coverage. Since the insurers all provided coverage during different time periods, one divisive and major issue, already raised by the insurers, concerns when any possible coverage was triggered.

 Trane, although not factually identical to this case, supports the proposition that insurers in the respective situations of USF&G, National Union, and Cigna are in substantial conflict. In Trane, the first-level excess insurer, American Motorists, brought suit seeking a declaration of the rights and liabilities of the four insurers. American Motorists named the insured and the other three insurers, Employers (primary carrier), St. Paul (second-level excess insurer), and American Home (third-level excess insurer), as defendants. Upon American Home's motion, the district court realigned Employers as a plaintiff, thereby destroying diversity jurisdiction. The district court noted that American Motorists was arguing that the underlying complaint did not allege an "occurrence" under either its policy or Employers' and that, therefore, neither insurer owed coverage. From this, the district court concluded that the insurers' "attitudes [were] insufficiently in conflict." Trane, 657 F.2d at 150 (quoting the district court's opinion).

 The Seventh Circuit Court of Appeals reversed, concluding that there was a substantial conflict between Employers and American Motorists. The Seventh Circuit reasoned that "because Employers is the underlying insurer, American Motorists would benefit from a holding that Employers had a duty to defend [the insured]. Conversely, if Employers were found not to be liable, American ...


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