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Empire Abrasive Equipment Company, LP v. Acceptance Insurance Co.

United States District Court, E.D. Pennsylvania

March 26, 2018

EMPIRE ABRASIVE EQUIPMENT COMPANY, LP, Plaintiff,
v.
ACCEPTANCE INSURANCE COMPANY, Defendant.

          MEMORANDUM OPINION

          RUFE, JUDGE.

         Plaintiff Empire Abrasive Equipment Company, LP (“Empire”), a manufacturer of air blasting equipment, brought suit against its Nebraska-based insurer, Defendant Acceptance Insurance Company (“AIC”), seeking indemnification for Empire's liabilities and legal expenses in defending a large number of personal injury suits. AIC is currently in state rehabilitation proceedings in Nebraska, and seeks to dismiss or stay Empire's suit on the grounds of the “full faith and credit clause” of the United States Constitution, [1] the Burford abstention doctrine, [2] and choice of law. For the reasons discussed below, the motion will be denied without prejudice.

         I. BACKGROUND

         The following facts are assumed to be true for purposes of Defendant's motion.

         Empire is a Pennsylvania corporation that for some period of time manufactured and sold equipment used for air blasting. In a number of lawsuits across the country, Empire, along with other equipment manufacturers, was alleged to have caused serious injury to users of their products and others through exposure to silica dust (“the Underlying Actions”). Empire has incurred substantial liability and litigation costs in defending and settling those suits.

         Empire had multiple insurance policies for liabilities and legal expenses. However, only one of these policies, which Empire purchased from AIC in 1992, covered silica-related claims where the date of first exposure occurred after July 1, 1986 (“the AIC policy”). The liability limit for this policy was $1 million, excluding legal defense costs. At some point in time, AIC and Empire's other insurers entered into a Confidential Defense and Indemnity Cost-Sharing Agreement (“CSA”), in which they divided the costs of defending and indemnifying the Underlying Actions among themselves. Empire was not a party to the agreement. Empire alleges that although it would have been in Empire's interest for AIC to indemnify post-July 1986 exposure claims only, AIC instead responded to $785, 000 in claims arising from pre-July 1986 exposure pursuant to the CSA. As a result, the AIC policy was exhausted in May 29, 2013, leaving Empire with no remaining coverage for post-1986 exposure for silica-related claims and legal expenses.

         In April 2008, AIC was placed in state rehabilitation proceedings pursuant to the Nebraska Insurers Supervision, Rehabilitation, and Liquidation Act.[3] As part of the rehabilitation proceedings, the District Court of Lancaster County, Nebraska entered an injunction against, inter alia, “[i]nstitution or further prosecution of any actions or proceedings, ” “[t]he obtaining of . . . judgments . . . against AIC, and its assets or its policyholders, ” and “[a]ny . . . threatened or contemplated action that might lessen the value of AIC assets or prejudice the right of policyholders, creditors or share holders or the administration of any proceeding under the Nebraska Insurers Supervision, Rehabilitation and Liquidation Act.”[4]

         Empire filed this suit seeking (1) declaratory judgment that AIC must continue to defend and indemnify Empire, that the AIC policy shall only apply to claims where the first exposure was after July 1, 1986, and that the limits of the AIC Policy have not been exhausted (Count I); and (2) damages for AIC's alleged breach of contract in refusing to defend and indemnify claims for exposure occurring after July 1, 1986 (Count II).

         II. STANDARD OF REVIEW

         Pursuant to Federal Rule of Civil Procedure 12(b)(6), dismissal of a complaint for failure to state a claim upon which relief can be granted is appropriate where a plaintiff's “plain statement” lacks enough substance to show that he is entitled to relief.[5] In determining whether a motion to dismiss should be granted, the court must consider only those facts alleged in the complaint, accepting the allegations as true and drawing all logical inferences in favor of the non-moving party.[6] Courts are not, however, bound to accept as true legal conclusions couched as factual allegations.[7] Something more than a mere possibility of a claim must be alleged; a plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.”[8] The complaint must set forth “direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory.”[9] In deciding a motion to dismiss, courts may consider “only allegations in the complaint, exhibits attached to the complaint, matters of public record, and documents that form the basis of a claim.”[10]

         III. DISCUSSION

         A. Full Faith and Credit

         At the outset, AIC asserts that Empire's claims must be dismissed because this Court must accord full faith and credit to the Order of Rehabilitation and Order of Injunction issued by the Nebraska state court. However, neither the Order of Rehabilitation nor the Order of Injunction addressed the merits of the claims presented by AIC in this suit and thus neither is entitled to preclusive effect. The full faith and credit clause, as codified in 28 U.S.C. § 1738, requires that state court decisions be given the same preclusive effect in federal court as they would be given in the courts of the rendering state.[11] Nebraska courts accord preclusive effect to state court decisions only when four conditions are met: (1) the identical issue was decided in a prior action, (2) there was a judgment on the merits which was final, (3) the party against whom the rule is applied was a party or in privity with a party to the prior action, and (4) there was an opportunity to fully and fairly litigate the issue in the prior action.[12] Here, because neither the Order of Rehabilitation nor the Order of Injunction addressed the merits of the claims alleged by Empire in this suit, neither would be accorded preclusive effect under Nebraska law, and neither is entitled to full faith and credit by this Court.[13]

         Moreover, state courts lack authority to enjoin in personam proceedings in the federal courts.[14] Thus, the Nebraska court's injunction against any legal proceedings against AIC cannot, by its own force, prohibit this Court from adjudicating Empire's claims.

         B. Choice of Law

         AIC also contends that Empire's claims should be dismissed because they rely on principles of Pennsylvania law that conflict with Nebraska law, and Nebraska law, not Pennsylvania law, should apply to Empire's claims. At this stage of the proceedings, the record does not allow the Court to conclude that Nebraska law should apply.

         Because this is a diversity case, the Court must apply the choice-of law-rules of the forum state, Pennsylvania.[15] Pennsylvania applies a flexible approach to choice of law, under which the courts must determine the state with the “most interest in the problem.”[16] Specifically, when a true conflict of law exists, courts must consider the “interests and policies that may be validly asserted by each jurisdiction”; “the location of the insured risk”; and the following contacts with respect to the contract itself: (1) the place of contracting; (2) the place of negotiation of the contract; (3) the place of ...


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