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Westfield Insurance Co. v. Icon Legacy Custom Modular Homes

United States District Court, M.D. Pennsylvania

May 12, 2017



          Matthew W. Brann United States District Judge

         The instant motion to compel requires me to determine whether, and to what extent, extrinsic evidence is discoverable in a declaratory insurance coverage action where bad faith is no longer at issue. At first blush, any learned practitioner would expect the proper resolution to flow naturally from rote application of settled contract principles. However, intrepid research and argumentation by counsel have plainly refuted that misconception.

         The underlying concepts that animate my decision are, of course, decades-old. Yet, precisely how courts should apply them to discovery disputes like this one are far from decided. Moreover, because amended Federal Rule of Civil Procedure 26(b)(1) prioritizes proportionality, whatever guidance the prevailing ad hoc approach once offered likely commands diminished weight today.

         I now seek to synthesize existing case law with this renewed focus on proportionality in discovery: I hold that litigants who wish to discover extrinsic evidence in a contract interpretation case must (1) point to specific language in the agreement itself that is genuinely ambiguous or that extrinsic evidence is likely to render genuinely ambiguous; and (2) show that the requested extrinsic evidence is also likely to resolve the ambiguity without imposing unreasonable expense. Because the insured here falls well short of meeting either of these twin aims, the instant motion to compel is denied, and the case must proceed to dispositive motions.

         I. BACKGROUND

         Plaintiff Westfield Insurance Company seeks a declaratory judgment that it need not compensate Defendant Icon Legacy Custom Modular Homes, a homebuilder from Selinsgrove, Snyder County, Pennsylvania to whom it sold a commercial general liability policy. Specifically, Plaintiff contends that it need not compensate the insured for three claims by modular home purchasers that allegedly arose from Defendant's faulty workmanship, because it argues that such conduct does not constitute an insurable “occurrence” under Pennsylvania law.

         Initially, Defendant was sued in two separate state court proceedings in New York and Massachusetts, and Plaintiff agreed to defend it as to those actions subject to a reservation of rights. Plaintiff then initiated this action in federal court, seeking a declaration that it owes Defendant no defense or indemnity under the subject policy as to those actions.

         When Defendant was sued for a third time, then in Vermont state court, Plaintiff amended its complaint and sought a similar declaration as to the newly filed action. In response, Defendant filed a counterclaim alleging that Plaintiff's decision to deny coverage in that third case was made in bad faith. Plaintiff thereafter filed a motion to dismiss, arguing that Defendant had failed to plausibly plead sufficient facts supporting its bad faith claim.

         This Court granted that motion on August 29, 2016, on the basis that Defendant had proffered little in the way of a showing of bad faith. The Court's key observation was as follows:

Most apparently, even taking for granted the similarity between any set of claims, coverage of some claims and denial of others is not per se evidence of bad faith insurance practices. For example, consider a hypothetical set of five claims, all of which are “similar” but none of which the insurer believes in good faith it is legally bound to offer coverage. The insurer could, if it wanted, offer coverage in none or all or two or three of those cases. Denial would not be made in bad faith under the law. Rather, it would be made based upon a calculated business judgment, risk avoidance, litigation forecasts, etc. The point is that “similarity” among claims is a poor predictor of bad faith denials in cases where either the claims' alleged similarity or the claims' coverage under the policy is not clearly established. I perceive both of those elements to be lacking here.

         Just as importantly, the Court expedited that motion based upon representations by both counsel that its quick disposition would help to resolve this action or at least move it forward.

         Shortly thereafter, however, the parties found themselves back on this Court's doorsteps, detailing again that they had reached several discovery impasses. As a result, the Court held a telephonic status conference on November 1, 2016, just two months after it issued its motion to dismiss Memorandum. I issued the following Order after the call that same day:

1. The discovery deadline is extended for a final time to December 30, 2016. No further extensions will be granted.
. . .
4. The Court strongly encourages the parties to independently and efficiently resolve any additional discovery disputes, keeping in mind the discussion that took place on the October 31, 2016 conference call, the Court's August 29, 2016 motion to dismiss memorandum, and Federal Rule of Civil Procedure 26(b)'s proportionality mandate.

         Despite the Court's admonitions, counsel, led by a December 28, 2016 letter by defense counsel, returned to the Court yet again, purportedly tangled in a discovery quagmire once more. Following that exchange, this Court granted Defendant leave to file any appropriate motions. I also held a comprehensive oral argument on March 9, 2017, at which time the parties addressed the two motions that Defendant filed: a motion to compel of dubious timing that largely seeks extrinsic evidence tangential to the declaratory claim; and a motion for sanctions over what might best be described as trivial (and perhaps justified) dust-ups by two otherwise sterling sets of advocates.

         Having delved deeply into the underbelly of the beast, I nevertheless remain of the view that “[f]or all of its procedural machinations, ” this case is “rather straightforward.” Westfield Ins. Co. v. Icon Legacy Custom Modular Homes, 2016 WL 4502456, at *1 (M.D. Pa. Aug. 29, 2016). As detailed more fully below, Defendant's motion to compel and motion for sanctions are both denied, and the case will now proceed to dispositive motions.

         II. LAW

         “It is well established that the scope and conduct of discovery are within the sound discretion of the trial court . . . and that after final judgment of the district court . . . our review is confined to determining if that discretion has been abused.” Marroquin-Manriquez v. I.N.S., 699 F.2d 129, 134 (3d Cir. 1983) (Aldisert, J.). “To find such abuse it is usually necessary to conclude that there has been an interference with a substantial right . . . or that the discovery ruling is seen to be a gross abuse of discretion resulting in fundamental unfairness in the trial of the case.” Id. Thus, the United States Court of Appeals for the Third Circuit has forewarned litigants that it “will not interfere with a trial court's control of its docket except upon the clearest showing that the procedures have resulted in actual and substantial prejudice to the complaining litigant.” In re Fine Paper Antitrust Litig., 685 F.2d 810, 817-18 (3d Cir. 1982) (Aldisert, J.).

         “Discovery need not be perfect, but discovery must be fair.” Boeynaems v. LA Fitness Int'l, LLC, 285 F.R.D. 331, 333 (E.D. Pa. 2012) (Baylson, J.). “The responses sought must comport with the traditional notions of relevancy and must not impose an undue burden on the responding party.” Hicks v. Arthur, 159 F.R.D. 468, 470 (E.D. Pa. 1995). “[T]he scope of [ ] discovery is not without limits.” Kresefky v. Panasonic Commc'ns & Sys. Co., 169 F.R.D. 54, 64 (D.N.J. 1996). As such, “[d]iscovery should be tailored to the issues involved in the particular case.” Id. As amended Federal Rule of Civil Procedure 26(b)(1) states:

Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable.

         “To determine the scope of discoverable information under Rule 26(b)(1), the Court looks initially to the pleadings.” Trask v. Olin Corp., 298 F.R.D. 244, 263 (W.D. Pa. 2014) (Fischer, J.). In ascertaining which materials are discoverable and which are not, a district court must further distinguish between requests that “appear[ ] reasonably calculated to lead to the discovery of admissible evidence, ” Bell v. Lockheed Martin Corp., 270 F.R.D. 186, 191 (D.N.J. 2010), and demands that are “overly broad and unduly burdensome.” Miller v. Hygrade Food Products Corp., 89 F.Supp.2d 643, 657 (E.D. Pa. 2000).

         “[T]he discovery rules are meant to be construed quite liberally so as to permit the discovery of any information which is relevant and is reasonably calculated to lead to the discovery of admissible evidence.” Fid. Fed. Sav. & Loan Ass'n v. Felicetti, 148 F.R.D. 532, 534 (E.D. Pa. 1993). “As an initial matter, therefore, all relevant material is discoverable unless an applicable evidentiary privilege is asserted. The presumption that such matter is discoverable, however, is defeasible.” Pearson v. Miller, 211 F.3d 57, 65 (3d Cir. 2000).

         Federal Rule of Civil Procedure 37(a)(3)(B) states that “[a] party seeking discovery may move for an order compelling an answer, designation, production, or inspection.” “In order to succeed on a motion to compel discovery, a party must first prove that it sought discovery from its opponent.” Petrucelli v. Bohringer & Ratzinger, 46 F.3d 1298, 1310 (3d Cir. 1995) (Cowen, J.) (citing Fed.R.Civ.P. 37(a)(1)). In addition, “[t]he party seeking the discovery has the burden of clearly showing the relevancy of the information sought.” Caver v. City of Trenton, 192 F.R.D. 154, 159 (D.N.J. 2000).

         III. ANALYSIS

         Consistent with the following analysis, both motions presently under consideration will be denied.

         A. Defendant's Motion to Compel is denied.

         Generic statements about ambiguity, extrinsic evidence, and four corners litter the applicable case law. However, instructions for mobilizing these concepts are unfortunately far less prevalent. A leading decision by the United States Court of Appeals for the Third Circuit that endeavored to harmonize this area of Pennsylvania contract law is Bohler-Uddeholm America, Inc. v. Ellwood Group, Inc., 247 F.3d 79 (3d Cir. 2001). Chief Judge Edward R. Becker, writing for a unanimous panel in Bohler-Uddeholm, graciously described that body of law as “somewhat complicated”: “while the broad principles are clear, it is not a seamless web.” Id. at 92.

         The Court of Appeals in Bohler-Uddeholm traced the following landscape of the law: the keystone principle of interpretation is that “the intent of the parties to a written contract is contained in the writing itself.” Id. (quoting Krizovensky v. Krizovensky, 624 A.2d 638, 642 (Pa. Super. Ct. 1993)). Thus, “where language is clear and unambiguous, the focus of interpretation is upon the terms of the agreement as manifestly expressed, rather than as, perhaps, silently intended.” Bohler-Uddeholm, 247 F.3d at 92-93 (quoting Steuart v. McChesney, 444 A.2d 659, 661 (Pa. 1982)).

         However, “where the contract terms are ambiguous and susceptible of more than one reasonable interpretation, however, the court is free to receive extrinsic evidence, i.e., parol evidence, to resolve the ambiguity.” Bohler-Uddeholm, 247 F.3d at 93 (quoting Krizovensky, 624 A.2d at 642). That being said, “because Pennsylvania presumes that the writing conveys the parties' intent, ” Bohler-Uddeholm, 247 F.3d at 93, a contract is ambiguous “if, and only if, it is reasonably or fairly susceptible of different constructions and is capable of being understood in more senses than one and is obscure in meaning through indefiniteness of expression or has a double meaning.” Id. (quoting Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 614 (3d Cir.1995)). See also Samuel Rappaport Family P'ship v. Meridian Bank, 657 A.2d 17, 21 (Pa. Super. Ct. 1995).

         Pennsylvania law also recognizes two types of ambiguity: “patent” and “latent.” Bohler-Uddeholm, 247 F.3d at 93. “While a patent ambiguity appears on the face of the instrument, ‘a latent ambiguity arises from extraneous or collateral facts which make the meaning of a written agreement uncertain although the language thereof, on its face, appears clear and unambiguous.'” Id. (quoting Duquesne Light, 66 F.3d at 614).

         Importantly, “[a] party may use extrinsic evidence to support its claim of latent ambiguity, but this evidence must show that some specific term or terms in the contract are ambiguous; it cannot simply show that the parties intended something different that was not incorporated into the contract.” Bohler-Uddeholm, 247 F.3d at 93. “Lest the ambiguity inquiry degenerate into an impermissible analysis of the parties' subjective intent, such an inquiry appropriately is confined to the parties linguistic reference. . . . The parties' expectations, standing alone, are irrelevant without any contractual hook on which to pin them.” Bohler-Uddeholm, 247 F.3d at 93 (quoting Duquesne Light, 66 F.3d at 614 n.9) (internal quotation marks omitted).

         “Of course, any use of extrinsic evidence to support an alternative interpretation of facially unambiguous language must be careful not to cross the ‘point at which interpretation becomes alteration of the written contract.'” Bohler-Uddeholm, 247 F.3d at 94 (quoting at Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1011 (3d Cir. 1980)). That sentiment reiterated by Bohler-Uddeholm is nothing new. In fact, I have previously noted, albeit in the analogous context of natural gas leases, that “[i]nterpretation is not concerned with the parties' post hoc judgments . . . as to what should have been.” Camp Ne'er Too Late, LP v. Swepi, LP, 185 F.Supp.3d 517, 544 (M.D. Pa. 2016). Rather, the interpreting court “seeks to be faithful to the meaning that the parties-given their positions at the time of contracting-would have given their words ex ante.” Id.

         The Bohler-Uddeholm court thus noted that “a court should determine whether the type of extrinsic evidence offered could be used to support a reasonable alternative interpretation under the precepts of Pennsylvania law on contract interpretation.” 247 F.3d at 94. Accordingly, “the key inquiry in this context will likely be whether the proffered extrinsic evidence is about the parties' objectively manifested ‘linguistic reference' regarding the terms of the contract, or is instead merely about their expectations.” Id. n.3. “The former is the right type of extrinsic evidence for establishing latent ambiguity under Pennsylvania law, while the latter is not.” Id. Consequently, “[e]vidence regarding a party's beliefs about the general ramifications of the contract would not be the right type to establish latent ambiguity.” Id. Thus, to truly exist, contractual ambiguity must be capable of being divined by a reasonable reader from the plain text of the document itself- courts should prioritize syntax over circumstance.

         Critically, I also note that extrinsic evidence may “support an alternative interpretation of a term that sharpens its meaning” but not “an interpretation that completely changes the meaning.” Mericle v. Jackson National Life Insurance Co., 193 F.Supp.3d 435, 449 (M.D. Pa. 2016) (Caputo, J.). For instance, such evidence “may be used to show that ‘Ten Dollars paid on January 5, 1980, ...

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