Opinion
No. 02 Civ. 3288 (DLC).
December 22, 2004
Richard A. Kissel, Charles Hyman, Kissel Pesce LLP, Tarrytown, NY, for Plaintiff Swiss Re International Business Insurance Company ("SRI").
George E. Ridge, Cooper Ridge Lantinberg, P.A., Jacksonville, FL, Cory E. Friedman, New York, NY, for Defendant Bert C. Roberts, Jr.
OPINION ORDER
On July 7, 2004, defendant Bert C. Roberts, Jr. ("Roberts"), a former chairman of the board of directors of WorldCom, Inc. ("WorldCom"), filed a motion to dismiss in SR Int'l Business Ins. Co. v. MCI, Inc., 04 Civ. 4567, for failure to join an indispensable party under Rule 19, Fed.R.Civ.P. SR International Business Insurance Company ("SRI") is a defendant in a lawsuit filed by Roberts. Roberts argues that SRI can litigate its claims within Roberts' action, and that the SRI action, which was filed second, should be dismissed, or at least consolidated with his action or stayed. For the reasons stated below, the SRI action is stayed.
Background
On June 25, 2002, WorldCom announced a massive restatement of its financial statements. The litigation concerning WorldCom filed in federal court, or successfully removed to federal court, has been consolidated for pretrial purposes in the Southern District of New York by the Judicial Panel on Multi-District Litigation and assigned to this Court. Roberts is named as a defendant in the consolidated WorldCom securities class action as well as in numerous other related lawsuits. The issues in and the history of the consolidated WorldCom securities litigation ("Securities Litigation") have been described in many previous Opinions.
See, e.g., In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392 (S.D.N.Y. 2003) (deciding motions to dismiss the consolidated class action complaint); In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267 (S.D.N.Y. 2003) (certifying the consolidated class action); In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 431 (S.D.N.Y. 2003) (deciding a motion to dismiss claims in an individual action which had been consolidated for pre-trial purposes with the Securities Litigation).
WorldCom and its officers and directors were primarily insured under a D O liability policy issued by National Union Fire Insurance Company of Pittsburgh, Pennsylvania ("National Union"). Following WorldCom's filing for bankruptcy protection in July 2002, on November 26, 2002, the bankruptcy court approved a settlement agreement between WorldCom and National Union in which the National Union D O policy was rescinded and voidedab initio as to WorldCom but not with respect to the officers and directors. Since then, National Union has paid its coverage in full, and the policy has been exhausted.
Aside from the National Union policy, however, several insurers, including Swiss Re International Business Insurance Company ("SRI"), sold excess coverage to WorldCom, and their obligations under such policies have not as yet been determined. SRI, for example, sold an excess directors, officers, and corporate liability policy to WorldCom in December 2001, and its policy provides $15 million in excess of $30 million in underlying coverage. Like virtually all of the other excess policies, SRI's policy explicitly states that it is "subject to the same insuring clauses, warranties, definitions, terms, conditions, exclusions, and other provisions as those contained" in the National Union policy. Most importantly, as part of its renewal application for the National Union policy, WorldCom was asked in November 2001 to provide copies of its 10-K for the year ending December 21, 2000; its 10-Qs for the second and third quarter of 2001; its annual report for 2000; and various registration statements filed with the Securities and Exchange Commission ("SEC"). It responded to these requests by referring National Union to its website. The plaintiffs in the Securities Litigation contend that WorldCom falsely described its financial state in those SEC filings. SRI contends that it is entitled to cancel its policy because of these false statements.
Other companies who sold excess coverage to WorldCom include Continental Casualty Company, Gulf Insurance Company, Associated Electric Gas Insurance Services Limited, Twin City Fire Insurance Company, and Starr Excess Liability Insurance International Limited. Collectively, they are referred to herein as "Excess Insurers."
After the Securities Litigation was underway, WorldCom demanded that the Excess Insurers, including SRI, acknowledge that the D O policies require them to pay the defense costs incurred in connection with that litigation. In response, in an August 12, 2002 letter, SRI informed WorldCom's insurance broker that it was rescinding its excess policy, and other Excess Insurers issued similar letters. With the costs of theSecurities Litigation mounting, Roberts filed a complaint against SRI and several other Excess Insurers on May 28, 2004, seeking a declaration of the rights, duties, and responsibilities of such insurers and specifically requesting a declaration that the purported rescissions by SRI and other insurers were without good and sufficient cause. See Roberts v. AEGIS, Ltd., No. 04 Civ. 4089 (DLC). For its part, less than a month later, SRI filed the instant action against MCI, Roberts, and dozens of other former officers and/or directors of WorldCom, including 50 John Does, seeking a declaration that the excess D O policy it issued is void ab initio and is therefore rescinded as to all named defendants. Included among the former directors and officers named as defendants was Juan Villalonga, who SRI described in its complaint as a resident of Spain and who, like Roberts, has been named as a defendant in many individual actions related to theSecurities Litigation.
On July 7, Roberts filed this motion to dismiss pursuant to Rule 12(h)(3), Fed.R.Civ.P., alleging that as SRI is a Swiss corporation and Villalonga is a Spanish citizen, the court does not have subject matter jurisdiction over the action under 28 U.S.C. § 1332(a)(2). In response to Roberts's motion, on July 21, SRI filed an amended complaint that does not name Villalonga as a defendant. As a result, Roberts now presses for dismissal of this action on different grounds, stating that Villalonga is an indispensable party under Rule 19(b), Fed.R.Civ.P. On August 2, SRI filed a sur-reply, in which it acknowledges that Villalonga may be a necessary party under Rule 19 (a), but disputes his indispensability.
The amended complaint also excludes all of the John Does.
Discussion
1. Failure to Join an Indispensable Party
Rule 19 sets forth a two-step test for determining whether a court must dismiss an action for failure to join an indispensable party. Fed.R.Civ.P. 19; Viacom Int'l, Inc. v. Kearney, 212 F.3d 721, 724 (2d Cir. 2000). First, the court must determine whether an absent party is a "necessary" party under Rule 19(a).Kearney, 212 F.3d at 724. Rule 19(a) provides that the absent party should be joined, if feasible, where:
(1) in the person's absence complete relief cannot be accorded among those already parties or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.
Fed.R.Civ.P. 19(a) (emphasis supplied). With respect to the second prong of Rule 19(a), "there must be more than an unsupported assertion that [the non-joined party] has a claim to that interest." Jonesfilm v. Lion Gate Int'l, 299 F.3d 134, 140 (2d Cir. 2002). In the event that "the resolution of a plaintiff's claim would require the definition of a non-party's rights under a contract, it is likely that the non-party is necessary under Rule 19(a)." Id. at 141.
Where a court makes a threshold determination that a party is necessary under Rule 19(a) and joinder of the absent party is not feasible for jurisdictional or other reasons, the court must then determine whether the party is "indispensable" under Rule 19(b). Fed.R.Civ.P. 19(b); Universal Reins. Co. v. St. Paul Fire Marine Ins. Co., 312 F.3d 82, 87 (2d Cir. 2002). Rule 19 (b) provides:
The court shall determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable. The factors to be considered by the court include: first, to what extent a judgment rendered in the person's absence might be prejudicial to the person or those already parties; second, the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person's absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder.
Fed.R.Civ.P. 19(b). Courts have understood Rule 19 to require an examination of the following variables:
(i) the plaintiff's interest in having a federal forum; (ii) the defendant's interest in avoiding multiple litigation, inconsistent relief and sole responsibility for liability jointly shared; (iii) the absent party's inability to protect its interest in any judgment rendered; and (iv) the public interest in complete, consistent, and efficient settlement of controversies.Vedder Price Kaufman Kammholz v. First Dynasty Mines, Ltd., 2001 WL 1190996, at *2 (S.D.N.Y. Oct. 9, 2001) (citing Provident Tradesman Bank Trust Co. v. Patterson, 390 U.S. 102, 108-11 (1968)); see also Envirotech Corp. v. Bethlehem Steel Corp., 729 F.2d 70, 73 (2d Cir. 1984) (same).
Within the Second Circuit, district courts must "take a `flexible approach' under Rule 19(b) when deciding whether parties are indispensable." Universal Reins. Co., 312 F.3d at 87 (2d Cir. 2002). "Very few cases should be terminated due to the absence of nondiverse parties unless there has been a reasoned determination that their nonjoinder makes just resolution of the action impossible." Id. (citation omitted).
Under the Rule 19 framework described above, Villalonga qualifies as a necessary party. Villalonga has an interest in the SRI policy and any declaration regarding the extent of its coverage. Without his participation in SRI's lawsuit, it is possible that SRI will incur inconsistent obligations. Since any judgment entered in his absence will not have any res judicata effect as to him, if SRI wins a judgment here declaring that it has no obligations to WorldCom's directors and officers under its policy, it is conceivable that in separate litigation, Villalonga could prevail against SRI and it would be required to extend coverage to him.
SRI does not dispute that Villalonga is a necessary party. It does contest his indispensability. Roberts has not shown that Villalonga is indispensable. SRI does have an interest in having this action resolved in a federal forum, and in particular before the MDL court. SRI's action and the other insurance litigation is just one component of the complex of lawsuits arising from the collapse of WorldCom. There are synergies and efficiencies for all parties and the court system in having the litigation concentrated before a single judge. There is the added benefit that two experienced judges of this Court are also supervising the settlement discussions from all of this litigation.
Since this is a declaratory judgment action, Roberts is not threatened with the imposition of liability. Because the WorldCom litigation is concentrated before a single court, there is minimal risk of inconsistent decisions. Villalonga, the absent party, can protect his own interests through litigating these issues within one of the other actions that raise these same issues.
The final factor, the public interest, as well as the defendant's interest in avoiding multiple litigation, suggest the appropriate resolution of this motion. The instant action, in which SRI seeks a declaration that the excess D O policy it issued to WorldCom is rescinded and void ab initio, arises from the same transaction or occurrence as Roberts v. AEGIS, Ltd., 04 Civ. 4089, through which Roberts seeks to enforce his rights under that policy. Therefore judicial economy and fairness to Roberts compel that SRI and Roberts's dueling claims be handled in the same proceeding.
Although Rule 13, Fed.R.Civ.P., does not prevent the filing of a "duplicative action instead of a compulsory counterclaim,"Adam v. Jacobs, 950 F.2d 89, 93 (2d Cir. 1991), Rule 13 is "particularly directed against one who failed to assert a counterclaim in one action and then instituted a second action in which that counterclaim became the basis of the complaint."Southern Const. Co. v. Pickard, 371 U.S. 57, 60 (1962). In such situations, courts may dismiss a later-filed action so that counterclaims can be filed in a prior action relating to the same transaction or occurrence. See Jacobs, 950 F.2d at 94 (remanding with instructions to dismiss one action so that party can file counterclaims in another case). Here, the appropriate course of action is to stay the second-filed action. All the parties should litigate their disputes in the first-filed action.
Where there are no jurisdictional impediments to the filing of the second action, courts may also consolidate the actions to avoid multiple litigation. See, e.g., Internet Law Library, Inc. v. Southridge Capital Mgmt., LLC, 208 F.R.D. 59, 63-64 (S.D.N.Y. 2002) (citation omitted) (declining to grant leave to party to "re-file its claims as counterclaims" on grounds that "the court can just as easily achieve the same result by consolidating the two actions").
Conclusion
For the reasons stated above, Roberts's motion to dismiss SR Int'l Bus. Ins. Co. v. MCI, Inc., 04 Civ. 4567, for failure to join an indispensable party is denied, but the action is stayed. The parties may litigate the issues presented by this litigation within Roberts v. AEGIS, Ltd., 04 Civ. 4089.SO ORDERED.