Caplan v. Fellheimer Eichen Braverman & Kaskey ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
10-24-1995
Caplan v Fellheimer
Precedential or Non-Precedential:
Docket 95-1445
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 95-1445 & 95-1478
MAIA CAPLAN,
Appellant in 95-1445
v.
FELLHEIMER EICHEN BRAVERMAN & KASKEY;
DAVID L. BRAVERMAN
and
MAIA CAPLAN,
v.
FELLHEIMER EICHEN BRAVERMAN & KASKEY;
DAVID L. BRAVERMAN
Vigilant Insurance Company,
Appellant in 95-1478
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action No. 94-cv-07506)
Argued August 3, 1995
Before: MANSMANN, HUTCHINSON* and ROTH, Circuit Judges
(Opinion Filed October 24, 1995)
1
* The Honorable William D. Hutchinson participated in the oral
argument and decision in this case, but died before he could join
or concur in this Opinion.
2
William H. Ewing, Esq. (Argued)
Carl Oxholm, III, Esq.
Albert G. Bixler, Esq.
Stephanie A. Philips, Esq.
Connolly, Epstein, Chicco
Foxman, Engelmyer & Ewing
1515 Market Street
Suite 900
Philadelphia, PA 19102
Attorneys for Appellant/Appellee Caplan
Carolyn P. Short, Esq. (Argued)
Kenneth M. Kolaski, Esq.
Reed, Smith, Shaw & McClay
1650 Market Street
2500 One Liberty Place
Philadelphia, PA 19103-7301
Attorneys for Appellees Fellheimer, Eichen,
Braverman and Kaskey, P.C. and David L.
Braverman
Helen M. Braverman, Esq.
Fellheimer, Eichen, Braverman & Kaskey
One Liberty Place
1650 Market Street
21st Floor
Philadelphia, PA 19103-7334
Attorney for Appellees Fellheimer, Eichen,
Braverman & Kaskey, P.C Appellees
Thomas A. Riley, Jr., Esq.
Riley, Riper, Hollin & Colagreco
240 Daylesford Plaza
P.O. Box 568
Paoli, PA 19301
Attorney for Appellee Braverman
Robert B. White, Jr., Esq. (Argued)
Rapp, White, Janssen & German
1800 JFK Boulevard
Suite 500
Philadelphia, PA 19103
Attorney for Appellant Vigilant Insurance
Company
OPINION OF THE COURT
3
ROTH, Circuit Judge:
Maia Caplan and Vigilant Insurance Company (Vigilant)
have brought this expedited appeal from the District Court's
Order of May 25, 1995. The order declared null and void an
agreement between Vigilant and Caplan, settling a civil action,
entitled Caplan v. Fellheimer Eichen Braverman & Kaskey et al.,
which Caplan had brought in the Eastern District of Pennsylvania.
The May 25 Order also enjoined Caplan from entering into any
settlement of the action unless defendants, Fellheimer Eichen
Braverman & Kaskey (FEB&K) and David Braverman, were parties to
the settlement.
The appellees, FEB&K and Braverman, have moved to
dismiss the appeal on the grounds both that the May 25 Order is
not an injunction appealable pursuant to 28 U.S.C. § 1292(a)(1)
and that the order is interlocutory and does not fall within the
"collateral order" exception to the final judgment rule.
Because we find that the May 25 Order is a preliminary
injunction, we conclude that we do have appellate jurisdiction of
the appeal. We also conclude that Vigilant is a proper party to
the appeal. Finally, because we find that the district court
erred in its assessment of the factors required to grant
injunctive relief, we will reverse the Order of May 25 and remand
this action to the district court for further proceedings
consistent with this opinion.
4
I. FACTS
In January 1995, Caplan filed a five count amended
complaint against FEB&K, the law firm where she had formerly been
employed, and against its managing partner Braverman, alleging:
(1) violations of Title VII of the 1964 Civil Rights Act, by
creating a hostile environment for women at the firm and by
sexually harassing Caplan's secretary; (2) negligent infliction
of emotional distress; (3) tortious interference with existing
and prospective contracts; (4) intentional infliction of
emotional distress; and (5) defamation. Defendants tendered the
amended complaint to Vigilant, their liability insurance carrier.
In February, Vigilant notified the defendants that it would
provide a defense for them on all counts of the amended complaint
but with a full reservation of rights. Vigilant reserved its
rights because it had determined that the first four counts of
the amended complaint were not covered under the insurance
contract.1
Defendants filed counterclaims against Caplan,
asserting malicious abuse of process and civil conspiracy to
maliciously abuse process. The district court dismissed these
1
Under Pennsylvania law, when an insured tenders multiple claims
to an insurer for defense, the insurer is obligated to undertake
defense of the entire suit as long as at least one claim is
potentially covered by the policy. See, e.g., American Contract
Bridge League v. Nationwide Mut. Fire Ins. Co., 752 F.2d 71, 75
(3d Cir. 1985). As to indemnification, however, the insurer is
obligated to its insured only for those damages which are
actually within the policy coverage. See, e.g., C.J. Heist
Caribe Corp. v. American Home Assur. Co., 640 F.2d 479, 483 (3d
Cir. 1981).
3
counterclaims as premature because the underlying action had not
been terminated in defendants' favor.
Vigilant's policy with FEB&K allows Vigilant to settle
suits without FEB&K's consent. The relevant provision of the
insurance policy reads as follows:
1. We will defend claims or suits against
the insured seeking damages to which this
insurance applies. We may make:
a. Such investigation of any
occurrence, claim or suit, and
b. Such settlement within the
applicable Amount of Insurance
available;
as we think appropriate.
Appendix (App.) at 248.
In April 1995, Caplan and the defendants entered into
settlement negotiations. Although the parties came close to an
agreement on monetary damages, they could not agree on other
issues, including defendants' demand that Caplan issue a public
retraction as part of any settlement. When they could not agree
on the wording of the public retraction, negotiations broke down.
On May 17, attorneys for both parties informed the district judge
that they could not reach a settlement.
At the same time as defendants were negotiating with
Caplan, they were also negotiating with Vigilant to take over
full defense and liability for the case in return for a payment
to them by Vigilant of $190,000, the settlement amount that
Caplan and defendants appeared to have agreed upon if Caplan
4
could be persuaded to issue a retraction. These negotiations
also broke down on May 17.
After the breakdown of negotiations, Vigilant's
attorney wrote to the district judge on May 17, requesting a
settlement conference. All counsel agreed that such a conference
would be helpful. At the request of the district judge, the
magistrate judge scheduled a conference for May 22. On the
morning of the conference, the defendants notified counsel for
Caplan that they would not be attending because one of their
attorneys was out of the country on vacation. Caplan's counsel
telephoned the magistrate judge's chambers to report defendants'
absence. Defendants did not notify Vigilant, and counsel for
Vigilant appeared at the magistrate judge's chambers to
negotiate. In addition, Caplan herself did not receive notice
that defendants and their counsel would be absent. She came up
from Washington, D.C., for the conference.
Although the conference was rescheduled, the magistrate
judge encouraged those present to discuss the possibility of
settlement. That same day, Vigilant and Caplan came to an
agreement under which Caplan would execute a general release of
all claims in favor of defendants in return for Vigilant's
payment to Caplan of $200,000. Caplan signed the release and her
attorneys executed a stipulation of dismissal with prejudice of
the suit. Both the release and the stipulation were to be held
by Vigilant pending delivery of the settlement funds.
The following day, May 23, defendants filed an
emergency motion with the district court, seeking an order
5
"temporarily restraining and, after hearing, preliminary [sic]
enjoining Plaintiff and her counsel from taking any action
whatsoever to consummate the purported 'settlement' arranged by
Plaintiff and Defendants' insurance carrier without the knowledge
and authorization of Defendants." App. at 128. In support of
the motion, defendants asserted that if the injunction were not
granted, defendants would "suffer irreparable harm" and that the
"harm to Defendants outweighs the harm the injunctive relief
sought may cause Plaintiff". The potential harm to defendants,
cited by them in their memorandum accompanying the motion,
included the loss of the right to vindication at trial and a
wrongful and irreparable deprivation of "the agreed to public
retraction from Plaintiff". Defendants claimed that their
"legitimate interests will be severely prejudiced if the Court
does not turn to its inherent equitable powers to grant
Defendants' motion in order to prevent this injustice." It is
apparent from defendants' memorandum that their prime interest in
voiding the settlement between Caplan and Vigilant was to be able
to bring an action against Caplan for wrongful use of civil
proceedings or for malicious prosecution. Under Pennsylvania's
malicious prosecution statute, 42 Pa. Cons. Stat. Ann. § 8351, an
essential element of such an action is that the underlying
litigation have terminated favorably to the defendant. See Junod
v. Bader, 458 A.2d 251 (Pa. Super. 1983) (holding that a
compromise is not an outcome sufficiently favorable to a
defendant to entitle him subsequently to bring a malicious
prosecution action against his accuser).
6
The district court held a hearing on the emergency
motion at 4:15 p.m. on May 23. Present at the hearing were the
attorneys for Caplan, for Braverman, for FEB&K, and for Vigilant.
Defendant Braverman was the only witness. He testified that
Caplan's suit had caused him and FEB&K embarrassment and loss of
business in the amount of "tens of thousands of dollars a month"
and that settlement of the suit without a public retraction from
Caplan would prevent defendants from clearing their names.
Although Vigilant was not a party to the proceeding and
had not made a motion to intervene, its counsel, Robert B. White,
was present and wished to make a statement. Counsel for FEB&K
opposed any appearance by Vigilant on the basis that Vigilant had
no standing to appear before the court.
The court, however, permitted White to speak. White
explained that the policy language gave Vigilant the unqualified
right to settle actions in which it provided a defense. He also
represented that in return for the agreed settlement payment of
$200,000, Vigilant had obtained a general release from Caplan
covering all five counts, along with a stipulation of dismissal
signed by Caplan's counsel. White stated that the case was over
and no injunction was necessary.
In its Order of May 25, the district court granted
defendants' motion for injunctive relief. In its Memorandum
Opinion, the court recited the four factors a court must consider
before granting injunctive relief: 1) reasonable probability of
success on the merits, 2) irreparable injury, 3) harm to the
other party, and 4) public interest.
7
In discussing likelihood of success on the merits, the
court defined the issue as "whether Defendants can have the
litigation settled for them by their insurance carrier." App. at
19. The insurance policy at issue was not before the court but
the court assumed for the sake of argument that the settlement
clause, as we have quoted it supra, was in the policy. The court
concluded that under Pennsylvania law an insurance company would
settle a case in bad faith if it settled "without regard to the
fact that it may be barring a counterclaim of the insured." App.
at 20, quoting Bleday v. OUM Group, 645 A.2d 1358, 1363 (Pa.
Super. 1994), allocatur denied 655 A.2d 981 (1955). The court
stated that it had to determine "whether Defendants have a
reasonable likelihood of showing that their rights will be
prejudiced by a settlement and that Vigilant was aware of this
when it negotiated a settlement with Plaintiff." App. at 21.
Because Vigilant was aware that defendants wanted to sue Caplan
for malicious prosecution and because a settlement would bar such
an action, the court concluded that defendants had adequately
demonstrated a reasonable probability of success on the merits of
their assertion that Vigilant had no authority to settle with
Caplan on defendants' behalf.
Turning to irreparable injury, the court found that
defendants would be damaged if a settlement eliminated their
ability to sue Caplan for malicious prosecution. As to harm to
the other party, the court determined that Caplan would suffer
from the delay in receiving her $200,000 check but this harm was
8
not greater than defendants' harm in losing their opportunity to
clear their names.
Finally, the court found that Caplan and Vigilant went
behind defendants' back to work out a settlement and that the
public interest was not served "by taking away Defendants' right
not to be buried without a fight, either at the settlement table
or before a jury of their peers." The court concluded that the
defendants had satisfied the requirements for a preliminary
injunction and "[d]ue to this showing, a preliminary injunction
shall be entered."
In the accompanying Order, the court decreed that:
"the settlement entered into between
Plaintiff and Defendants' Insurance Carrier
on May 22, 1995 is hereby declared null and
void. It is hereby FURTHER ORDERED that
Plaintiff is enjoined from entering into any
settlement of this action unless Defendants
are a party to such settlement."
Caplan and Vigilant both appealed this order.
The district court had jurisdiction of this case under
28 U.S.C. §§ 1331, 1343, and 1367. Our jurisdiction to hear this
appeal will be the first issue discussed.
II. DISCUSSION
A.
Defendants-appellees, FEB&K and Braverman, contend
first that the May 25 Order of the district court is not an
appealable order, either as an injunction or under the collateral
order exception to the final judgment requirement. See Cohen v.
Beneficial Indus. Loan Corp., 337 U.S. 541 (1949). Because we
9
find that the order is appealable as an injunction under 28
U.S.C. § 1292(a)(1),2 we will not go on to consider either the
collateral order exception or appellants' alternative petition
for a writ of mandamus.
Our review of our jurisdiction to hear this appeal is
plenary. Anthuis v. Colt Indus. Operating Corp., 971 F.2d 999,
1002 (3d Cir. 1992).
Despite the language of their emergency motion and of
their argument before the district court and despite the wording
of the May 25 Order, defendants contend that the order is not an
injunction nor is it the type of injunctive order which is
appealable under § 1292(a)(1). They assert instead that "this
action by the Court was an exercise of its inherent and Rule 16
supervisory powers to manage its docket and not an injunction."
This supervisory power, they contend, is the power of the court
to enforce or to undo a purported settlement. The case cited by
defendants to support this proposition is Fox v. Consolidated
Rail Corp., 739 F.2d 929 (3d Cir. 1984), cert. denied 469 U.S.
1190 (1985), in which we affirmed the district court's refusal to
reopen Federal Employers' Liability Act (FELA) cases which had
been brought and then settled in the Pennsylvania state courts.
2
Section 1292(a)(1) provides in pertinent part:
(a) [T]he courts of appeals shall have
jurisdiction of appeals from:
(1) Interlocutory orders of the
district courts of the United States . .
. granting, continuing, modifying,
refusing or dissolving injunctions, or
refusing to dissolve or modify
injunctions . . ..
10
In Fox, we agreed with the district court that settlement
agreements should be enforced in the same court in which the
original litigation had taken place. Id. at 932-33.
In support of their position that the May 25 Order was
not an injunction, defendants also cite the case of Saber v.
FinanceAmerica Credit Corp., 843 F.2d 697 (3d Cir. 1988) in which
the district court had granted plaintiffs' motion to enforce a
settlement agreement against defendants. We dismissed the
appeal, holding that an order to pay money under the settlement,
a legal remedy, was "not transformed into an injunctive remedy
merely by a district court's imposition of a time limit on the
defendants' obligation to pay." Id. at 702-03.3
In their efforts to demonstrate that the May 25 Order
is not an injunction, defendants have also distinguished
appealable injunctions from injunctions which were incidental to
a pending action and which were unrelated to the substantive
issues of the case. See Hershey Foods Corp. v. Hershey Creamery
Co., 945 F.2d 1272, 1279 (3d Cir. 1991) (holding that orders that
focus on procedural issues and do not grant or deny part of the
substantive relief sought by claimant are not immediately
appealable under § 1292(a)(1)).
Caplan and Vigilant, on the other hand, support their
position that the May 25 Order is an appealable injunction by
citing the case of Cohen v. Trustees of the Univ of Medicine &
3
We did note in Saber that we were leaving undecided the question
whether an order to pay money, enforceable by a contempt
citation, was an injunction. Id. at 703.
11
Dentistry of N.J., 867 F.2d 1455, 1464 (3d Cir. 1989) in which we
held that an order by the district court, directing reinstatement
of a medical school professor, was appealable because it granted
part of the ultimate relief sought by the claimant.
We noted:
For purposes of 28 U.S.C. § 1292(a)(1),
injunctions may be affirmatively defined as
follows:
Orders that are directed to a party,
enforceable by contempt, and designed to
accord or protect "some or all of the
substantive relief sought by a
complaint" in more than a [temporary]
fashion.
Id. at 1465 n.9 (brackets in original) (quoting Charles A. et
al., Federal Practice and Procedure, § 3922, at 29 (1977)). We
distinguished non-appealable injunctive orders as having in
common the characteristic that "while significant, [they do] not
either grant or deny the ultimate relief sought by the claimant."
867 F.2d at 1464.
Reviewing the relevant case law, in light of the facts
of the present case, we conclude that the May 25 Order is an
appealable order because it does qualify as an injunction under
28 U.S.C. § 1292(a)(1). The order does not deal with pre-trial
procedural issues. See Hershey Foods, 945 F.2d at 1279. It does
not order the legal remedy of specific performance of the payment
of a sum of money. See Saber, 845 F.2d at 702-03.
The May 25 Order does attempt to undo a settlement.
Even so, Fox, the case cited by appellees to support their
position that approval of settlement orders is part of a district
12
court's supervisory powers, supports only a narrower proposition:
that a federal court should not try to reopen a settlement
arrived at in a case which was litigated and settled in state
court. Fox does not stand for the proposition that federal court
judges may interject themselves into any particular case before
them to pass on the propriety of the settlement in that case.
Our federal courts have neither the authority nor the
resources to review and approve the settlement of every case
brought in the federal court system. There are only certain
designated types of suits, for instance consent decrees, class
actions, shareholder derivative suits, and compromises of
bankruptcy claims where settlement of the suit requires court
approval. Cf. United States v. City of Miami, 614 F.2d 1322 (5th
Cir. 1980), reh'g granted 625 F.2d 1310, aff'd in part, vacated
in part, 664 F.2d 435 (5th Cir. 1981) (en banc):
In what can be termed "ordinary
litigation," that is, lawsuits brought by one
private party against another private party
that will not affect the rights of any other
persons, settlement of the dispute is solely
in the hands of the parties. If the parties
can agree to terms, they are free to settle
the litigation at any time, and the court
need not and should not get involved.
* * *
Moreover, procedurally it would seem to
be impossible for the judge to become
involved in overseeing a settlement, because
the parties are free at any time to agree to
a resolution of the dispute by private
contractual agreement, and to dismiss the
lawsuit by stipulation. In this situation,
then, the trial court plays no role in
overseeing or approving any settlement
proposals.
13
614 F.2d at 1330. See also Gardiner v. A.H. Robins Co., 747 F.2d
1180, 1189 (8th Cir. 1984) ("[in] lawsuits between private
parties, courts recognize that settlement of the dispute is
solely in the hands of the parties.").
Defendants argue in opposition to this result that they
did not consent to this settlement of the lawsuit because it is
contrary to their interests. It was only when Caplan and
Vigilant started negotiating "behind defendants' backs" that a
settlement was reached. They contend that that settlement should
not be effective since they were not a party to it. What
defendants overlook, however, is that in their contract with
Vigilant for insurance coverage, they have authorized Vigilant to
act as their agent to settle claims or suits as Vigilant thinks
"appropriate." Vigilant is not required by the policy to obtain
the defendants' approval of any settlement.4
From our examination of facts of the present case, we
conclude that the May 25 Order is an appealable injunction
because it did deny the substantive relief sought by Maia Caplan.
See Cohen, 867 F.2d at 1464. Caplan's suit included a claim for
damages. She reached an advantageous settlement of that claim
with defendants' insurance company, which was acting in its
4
There are insurance policies which require the insured's consent
to settlement. Cf. Brion v. Vigilant Ins. co., 651 S.W.2d 183,
184 (Mo. App. 1983) (holding that provision of insurance contract
requiring insured's consent prior to settlement is essentially a
"pride" provision which gives insured control over litigation
affecting his reputation). Had defendants elected to negotiate
for a policy under which they had the right to approve settlement
of litigation for which the insurer provided the defense, their
position here would be justified. Defendants, however, did not
choose to purchase such a policy.
14
capacity as the agent defendants had authorized to settle claims
for them. Under the terms of the settlement, Caplan was to
receive a payment of $200,000 in return for releasing all her
claims against defendants. By her agreement to the settlement,
Caplan expressed her satisfaction with the relief she had
obtained from the entire litigation. The May 25 Order voided the
settlement and denied Caplan the realization of that relief.
In addition, the May 25 Order would appear to be
enforceable by contempt. It does not say so in so many words but
it implies as much in its commanding tone: "Plaintiff is
enjoined from entering into any settlement of this action unless
Defendants are a party to such settlement." Caplan would defy
such an order at her peril.
B.
Having determined that the May 25 Order is an
appealable injunction under § 1292(a)(1), we turn to defendants'
next argument -- that Vigilant does not have standing to appeal
that order because it was not a party of record before the
district court. Generally, it is true that those who were not
parties before the district court may not appeal an order of the
district court. We have, however, recognized that a non-party
may bring an appeal in a situation where three conditions are
met: 1) the equities favor the appeal; 2) the non-party has
participated in some way in the proceedings before the district
court; and 3) the non-party has a stake in the outcome of the
district court proceedings, which is discernable from the record.
Binker v. Pennsylvania, 977 F.2d 738, 745 (3d Cir. 1992) (citing
15
EEOC v. Pan American World Airways, Inc., 897 F.2d 1499 (9th Cir.
1990), cert. denied, 498 U.S. 815 (1990)).
Defendants assert that Vigilant does not qualify under
the Binker test because it had a chance to intervene in the
district court but chose not to do so, because its interests are
adequately represented by Caplan, because it can still negotiate
a settlement with Caplan as long as the defendants are also
present, and because it can still negotiate a policy release with
the defendants.
The defendants do acknowledge that Vigilant did
participate in the hearing on defendants' emergency motion, over
their objections, and that Vigilant has a stake in the appeal
"because without a settlement it must continue to fulfill its
duty to defend." Appellees' Brief at 33 n.8. With these
concessions, the only Binker factor left for us to determine is
whether the equities favor permitting Vigilant to join in this
appeal. We conclude that Vigilant's interest, both specifically
in this case and generally in upholding its contractual terms
with its policy holders, is adequate to satisfy the Binker
factors. The fact that Vigilant may still negotiate a settlement
which meets with defendants' approval should not preclude it from
asserting its interest in completing the settlement with Caplan
which it negotiated, pursuant to its contractual agreement with
defendants. Any other result would require Vigilant to expend
further defense costs in a suit which it had terminated in a
manner expressly permitted by the terms of the policy.
16
Our evaluation of the equitiesnding of bad faith in
settlement has been made against an insurer. Sh and that this
misconduct on Vigilant's part should trump the provisions of the
insurance contract. Defendants are correct in their contentions
that they cannot pursue an action for malicious prosecution
against Caplan unless Caplan's suit against them is terminated
favorably to them and that under Pennsylvania law a settlement is
not considered to be a favorable termination. See, e.g., Junod
v. Bader, 458 A.2d 251 (Pa. Super. 1983). However, the language
in FEB&K's policy with Vigilant expressly authorizes Vigilant to
settle suits as Vigilant deems appropriate. This grant of
discretion to Vigilant permits it, in its evaluation of a
settlement, to consider factors such as the likelihood of
defendants being found liable, the cost to Vigilant of defense of
the suit, the impression which various parties and witnesses may
make at the trial, the strength of the evidence, and the nuisance
value of the claim. Cf. Shuster v. South Broward Hosp. Dist.
Physicians' Professional Liab. Ins. Trust, 591 So. 2d 174 (Fla.
1992) (interpreting "deems expedient" provision to grant insurer
exclusive authority to control settlement, guided by its own
self-interest, including settlement for nuisance value of the
claim).5 This type of provision also permits the insurer to
settle a suit that presents no valid claim against the
defendants. See, e.g., Marginian v. Allstate Ins. Co., 481
5
A policy provision that the insurer may settle a suit it "deems
expedient" is similar to the "settle when appropriate" provision
found here.
17
N.E.2d 600, 602 (Ohio 1985) (interpreting "deems appropriate"
provision to give insurer right to settle on behalf of insured
even if claims are fraudulent or groundless). In view then of
the construction which has been given to this type of policy
language, we cannot see that Vigilant acted in bad faith in
arriving at a settlement with Caplan without first obtaining
defendants' approval of the terms of settlement.
Moreover, the claim by defendants of bad faith on
Vigilant's part is not directed to that category of actions by an
insurer where the courts most often have found bad faith by an
insurer in settlement. It is primarily in cases of an insurer's
failure or refusal to settle within policy limits that a finding
of bad faith in settlement has been made against an insurer. See,
e.g., Gedeon v. State Farm Mut. Auto. Ins. Co., 188 A.2d at 322
(holding that insurer assumes a duty to act in good faith and is
derelict where it unreasonably refuses an offer of settlement);
Marginian, 481 N.E.2d at 603 (finding that a common thread
running through most bad faith settlement claims is that insurer
failed to settle within policy limits); 7C John Alan Appleman,
Insurance Law & Practice (Walter F. Berdal ed., 1979) §§ 4711,
4712.
Cases are much rarer in which an insured claims bad
faith because the insurer has settled within the policy limits.
See Jon Epstein, Annotation, Liability of Insurer to Insured for
Settling Third-Party Claim Within Policy Limits Resulting in
Detriment to Insured, 18 ALR5th 474 (1994). It is that type of
claim, arising from a settlement within policy limits, which is
18
defendants' basis for arguing that the settlement here should be
voided because Vigilant's bad faith will prevent defendants from
recovering from Caplan for their alleged loss of business and
harm to their reputations. Defendants' position is based on
Bleday, 645 A.2d 1358. In Bleday, however, the Pennsylvania
Superior Court held that the insured's complaints of increased
insurance premiums, loss of business, and harm to reputation
would not support a cause of action under Pennsylvania law
against an insurer for bad faith in settling a suit within policy
limits:
We cannot find, in a situation where the
insured freely enters into an insurance
contract with "deems expedient" language,
that an insurer has settled a claim in bad
faith when these types of damages may occur
prospectively.
Id. at 1363. Bleday does not then support defendants' position
that Vigilant's actions in settling with Caplan amount to bad
faith by Vigilant toward defendants.
Vigilant argues that it should not be required to seek
the consent of the insured to settle in the absence of a
provision in the policy that such consent was required.
Vigilant's position in making this contention is supported by
Pennsylvania law. Indeed, Vigilant might be exposed to a finding
of unfair or deceptive acts or practices in the business of
insurance under Pennsylvania's Unfair Insurance Practices Act
(UIPA), 40 P.S. §§ 1171.1 et seq., if it made a practice of:
(xv) Refusing payment of a claim solely on
the basis of an insured's request to do so
unless:
19
(a) The insured claims sovereign,
eleemosynary, diplomatic, military service,
or other immunity from suit or liability with
respect to such claim;
(b) The insured is granted the right under
the policy of insurance to consent to
settlement of claims; or
(c) the refusal of payment is based upon the
insurer's independent evaluation of the
insured's liability based upon all available
information.
40 P.S. § 1171.55(a)(xv)(a)-(c) (emphasis added).
Section 1171.5(a)(xv)(b) of the UIPA demonstrates that
the Pennsylvania legislature recognizes the significance of an
insured's consent to settle provision in an insurance policy.
Such a consent-to-settle provision protects the professional,
such as a doctor or a lawyer, who is concerned about his or her
reputation. See, e.g., Feliberty v. Damon, 527 N.E.2d 261, 262
(N.Y. 1988); Brion v. Vigilant Ins. Co., 651 S.W.2d 183, 184 (Mo.
App. 1983). An insured's subjective opposition to settlement for
reasons such as reputation may impede an insurer from settling
with a third party. The Pennsylvania legislature has, however,
established the policy that, unless the insurance contract so
provides, insurers may not delay settling with third parties on
the ground that the insured objects to settlement. If Vigilant
is prevented from settling the present case, it may find itself
unable to settle other cases involving Pennsylvania insureds who
are unwilling to consent. Such a practice by Vigilant would
violate the UIPA.
We find, therefore, that the equities favor permitting
Vigilant to appeal an injunction that would void this settlement.
20
Vigilant has a strong interest in upholding the provisions of its
insurance policy. Moreover, under Bleday, the damages defendants
are claiming, as a result of bad faith in settlement, are not
recognized under Pennsylvania law as supporting a claim of bad
faith by the insured against the insurer. In addition, under the
UIPA, Vigilant could be found to be engaging in unfair insurance
practices if it made a practice of refusing to settle claims
under a "settle when appropriate" policy simply because the
insured opposed settlement.
The district court came to a different conclusion,
citing Bleday, 645 A.2d 1358, for the proposition that "settle
when appropriate" language in an insurance policy does not give
an insurer the power to settle a case when that settlement is in
bad faith and is contrary to the intent and expectation of the
parties. Defendants also rely on Bleday to support their
position that an insurance company cannot settle a suit over the
objection of the insured if that action would have the effect of
extinguishing a claim of the insured.
The district court's and the defendants' reliance on
those aspects of Bleday is, however, unpersuasive. In Bleday the
Pennsylvania Superior Court was considering the insurer's
authority to settle a suit when such a settlement would
extinguish an existing counterclaim in that same suit.6 The
6
This concept, that settlement and consequent dismissal of an
action should not result in the dismissal of an existing
counterclaim, is also recognized in the Federal Rules of Civil
Procedure. Dismissal of an action in which a counterclaim has
been filed is barred under Rule 41(a)(2) when the defendant
objects "[i]f a counterclaim has been pleaded by a defendant
21
counterclaim which defendants had filed in the present suit had,
however, already been dismissed by the district court as
premature. Vigilant's settlement with Caplan has no effect on
that no-longer-existent counterclaim. The fact that the
settlement may have an effect on a future action which defendants
would like to bring against Caplan is an entirely different issue
from the one discussed in Bleday.
Finally, although Caplan may, as defendants claim, have
a common interest with Vigilant in enforcing the settlement she
negotiated, Vigilant's interest is broader than Caplan's because
of the effect the May 25 Order may have on Vigilant's policies
with other insureds.
We conclude, therefore, that the equities support
permitting Vigilant to participate in this appeal.7
C.
Having determined that the May 25 Order is appealable
and that Vigilant is a proper party to the appeal, we next turn
to the question of whether the district court properly issued the
preliminary injunction. We conclude that the district court
erred in granting the injunction because the court misinterpreted
the clear language of the insurance policy and because it
prior to the service upon the defendant of the plaintiff's motion
to dismiss . . . unless the counterclaim can remain pending for
independent adjudication by the court."
7
Because we have determined that Vigilant may join in this
appeal, we will not go on to analyze appellants' claim that
Vigilant was a necessary party to the district court proceedings
pursuant to Fed. R. Civ. P. 19.
22
incorrectly analyzed the factors of irreparable injury and of
likelihood of success on the merits.
We review the district court's granting of the
injunction to determine whether the court abused its discretion,
committed an obvious error in applying the law, or made a serious
mistake in considering the proof. In re Assets of Myles Martin,
1 F.3d 1351, 1357 (3d Cir. 1993).
The first factor we will review is irreparable injury.
The consideration of the factor of irreparable injury is relevant
to the granting of a preliminary injunction because the purpose
of such an injunction is to protect the moving party from
irreparable injury until the court can render a meaningful
decision on the merits. See 11A Charles A. Wright et al.,
Federal Practice & Procedure 2D § 2947 (1995).
In order to demonstrate irreparable harm
the [moving party] must demonstrate potential
harm which cannot be redressed by a legal or
an equitable remedy following a trial. The
preliminary injunction must be the only way
of protecting the [moving party] from harm.
Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797,
801 (3d Cir. 1989).
The district court defined the irreparable harm to
defendants here as the damage to their ability to seek legal
redress against Caplan in a malicious prosecution action. App.
at 23. The outcome of the present action will of course
determine defendants' ability to sue Caplan because they cannot
do so unless this action terminates favorably to them. The
termination which defendants fear is a settlement like the one
23
negotiated by Caplan and Vigilant. But defendants contracted
with Vigilant to authorize Vigilant to settle this litigation.
Because defendants have acted to permit the outcome which they
find unacceptable, we must conclude that such an outcome is not
an irreparable injury. If the harm complained of is self-
inflicted, it does not qualify as irreparable. See 11A Charles
A. Wright, Federal Practice & Procedure § 2948.1 pp. 152-53
(1995).
We conclude, therefore, that the harm of which
defendants complain is not irreparable. Moreover, with this
finding, the balancing of harms shifts to weigh in favor of Maia
Caplan. If the present settlement is voided and defendants
required to agree to any future settlement, Caplan at the least
faces a delay in receiving the negotiated settlement amount. In
addition she may be forced to undergo further stress and
harassment by having to continue in this litigation which she had
settled favorably to her interests.
We next consider the factor of likelihood of success on
the merits. The district court defined likelihood of success as
being "not the merits of the litigation between Plaintiff and
Defendants, but the question whether Defendants can have the
litigation settled for them by their insurance carrier." App. at
19. The district court concluded that "Defendants have a
reasonable probability of success on the merits of their
assertion that Vigilant has no authority to make this settlement
with Plaintiff on Defendants' behalf." App. at 22.
24
The language of the policy, however, clearly provides
for Vigilant to settle suits in which it is defending claims.
Vigilant is required under Pennsylvania law to defend all claims
in a suit if at least one claim is covered by the policy. See
American Contract Bridge League, 752 F.2d at 75. Because the
policy language permits Vigilant to settle a suit it is
defending, it may do so whether or not all claims in the suit are
covered by the policy. There is no provision which limits
settlement of suits to those in which only covered claims are
being defended by the insurer. It is not unusual for an
insurance company to make a reservation of rights in defending a
suit, as to certain of the claims made in the complaint or as to
coverage periods or as to certain named defendants or as to the
whole claim because of untimely notification by the insured.
Under the policy language, the sole determination required of
Vigilant in settling a suit is that it thinks the settlement is
appropriate.
As we have discussed in Part II. B above, this
settlement provision should be enforced as expressed in the
policy. If for reasons of professional reputation an insured
wishes to control the settlement of cases, policies are available
which provide that protection. FEB&K did not, however, purchase
this type of coverage. It is not appropriate for us to amend the
policy here in order to give FEB&K a type of coverage for which
it didn't contract. Cf. Brokers Title Co. v. St. Paul Fire &
Marine Ins. Co., 610 F.2d 1174, 1181 (3d Cir. 1979) ("it is not
the function of the court to redraft a contract to be more
25
favorable to a given party than the agreement he chose to
enter.").
Because we conclude that the policy should be enforced
as written, we consequently conclude that the defendants did not
have a likelihood of prevailing in their claim that Vigilant had
no authority to make the settlement with Caplan on defendants'
behalf. Defendants cannot succeed in their efforts to void a
settlement which we have determined was appropriately arrived at
and which will terminate this case. For this reason, we find
that the district court erred in its analysis of likelihood of
success on the merits.
III. CONCLUSION
Because we find that the district court improperly
determined both that defendants would suffer irreparable harm if
the settlement of the case was permitted to remain in effect and
that defendants were likely to succeed in their assertion that
Vigilant was not authorized to settle with Maia Caplan on behalf
of defendants, we conclude that the court erred in granting the
relief which it did in its May 25 Order. We will reverse the
Order of May 25, voiding the settlement and enjoining Caplan from
entering into any settlement unless defendants were a party to
that settlement. We will remand the case to the district court
with directions to dismiss it with prejudice when the stipulation
of dismissal, signed by Caplan's counsel, has been filed with the
court.
26