United States Fire Insurance v. Asbestospray, Inc.

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
6-29-1999
US Fire Ins Co v. Asbestospray Inc
Precedential or Non-Precedential:
Docket 98-1153,98-1154,98-1854
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Filed June 29, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 98-1153, 98-1154 and 98-1854
UNITED STATES FIRE INSURANCE COMPANY and
THE NORTH RIVER INSURANCE COMPANY,
Appellants in No. 98-1854,
v.
ASBESTOSPRAY, INC.; SPRAYCRAFT, INC.;
ASBESTOS PRODUCTS MANUFACTURING
CORPORATION; H&A CONSTRUCTION CO., INC.;
GROVER C. ADAMS; JOSEPH H. ALBERT; GEORGE
AMENT; HARVEY J. BEECOFT; HERBERT OBERRY BEST;
EUGENE BOROFSKY; MAYOR AND CITY COUNCIL OF
BALTIMORE; AMCHEM PRODUCTS, INC.; AMERICAN
HOME PRODUCTS CORPORATION; ANCHOR PACKING
CO.; A.P. GREEN INDUSTRIES, INC.; ARMSTRONG
WORLD INDUSTRIES; CONTAINTEED CORP.; DANA
CORPORATION; FIBREBOARD CORPORATION; KEENE
CORP.; NATIONAL GYPSUM COMPANY; STICH, ANGELL,
KREIDLER, BROWNSON & BALLOU, P.A.; WILSON,
ELSER, MOSKOWITZ, EDELMAN & DICKER; WILENTZ,
GOLDMAN & SPITZER,
v.
ENVISION CLAIMS MANAGEMENT CORPORATION;
JOHN DOE 1-10, INDIVIDUALLY; JANE DOE 1-10,
INDIVIDUALLY; XYZ CORP., 1-10, BODIES CORPORATE,
Third-Party Defendants
Stich, Angell, Kriedler, Brownson & Ballou, P.A.,
Appellant in No. 98-1153
The Estate of Frederick Whitaker and Weitz and
Luxenberg, P.C.,
Appellants in No. 98-1154
ON APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(Civ. No. 97-4020)
District Judge: The Honorable Charles R. Weiner
Argued: April 7, 1999
Before: SLOVITER and ALITO, Circuit Judges,
and ALARCON, Senior Circuit Judge*
(Opinion Filed: June 29, 1999)
DUGAN, BRINKMANN, MAGINNIS
AND PACE
EUGENE J. MAGINNIS, JR.,
(ARGUED)
1880 John F. Kennedy Boulevard
Suite 1400
Philadelphia, PA 19103
Counsel for Appellant, Stich, Angell,
Kreidler, Brownson & Ballou, P.A. in
No. 98-1153
WEITZ & LUXENBERG, P.C.
JOHN J. PREEFER
180 Maiden Lane
New York, NY 10038
Counsel for Appellants, Frederick W.
Whitaker and Weitz & Luxenberg,
P.C. in No. 98-1154
_________________________________________________________________
*The Honorable Arthur L. Alarcon, United States Senior Circuit Judge for
the Court of Appeals for the Ninth Circuit, sitting by designation.
2
KLETT LIEBER ROONEY &
SCHORLING
JAMES LEWIS GRIFFITH
Two Logan Square, Twelfth Floor
Philadelphia, PA 19103
WOLF, BLOCK, SCHORR &
SOLIS-COHEN LLP
WILLIAM G. FREY (ARGUED)
VIRGINIA LYNN HOGBEN
12th Floor Packard Building
111 South 15th Street
Philadelphia, PA 19102
Attorneys for United States Fire
Insurance Company and The North
River Insurance Company, Appellees
in Nos. 98-1153 and 98-1154, and
Appellants in No. 98-1854
COOPER & TUERK, LLP
CARL E. TUERK, JR. (ARGUED)
201 North Charles Street,
Suite 2300
Baltimore, MD 21201
LEVY PHILLIPS & KONIGSBERG,
LLP
STANLEY J. LEVY
520 Madison Avenue, 4th Floor
New York, NY 10022
Attorneys for Mayor & City Council
of Baltimore, Appellees
GREITZER AND LOCKS
GENE LOCKS
MARTIN GREITZER
JONATHAN W. MILLER (ARGUED)
1500 Walnut Street, 20th Floor
Philadelphia, PA 19102
Attorneys for Eugene Borofsky,
Appellee
3
OPINION OF THE COURT
ALITO, Circuit Judge:
Before us are two consolidated appeals. In the first,
Stich, Angell, Kreidler, Brownson and Ballou, P.A. ("Stich,
Angell"), Frederick Whitaker ("Whitaker") and Weitz &
Luxenberg, P.C. ("Weitz & Luxenberg") appeal the District
Court's January 21, 1998 order, which declared a
distribution of funds held by the Stich, Angellfirm in
escrow for the United States Fire Insurance Company ("U.S.
Fire") and The North River Insurance Company ("North
River") (collectively, the "Insurers") to be in violation of an
earlier injunction. We dismiss this appeal for lack of
jurisdiction.
In the second appeal, the Insurers challenge the District
Court's August 28, 1998 Order dismissing their statutory
interpleader action for laches and for lack of jurisdiction.
The Insurers also contest the District Court's ruling that
the Insurers waived certain attorney-based privileges. We
hold that the District Court possessed jurisdiction over the
interpleader action, and therefore reverse the District
Court's dismissal for lack of jurisdiction. With respect to
the laches defense, we hold that the District Court erred in
calculating the length of the Insurers' delay infiling the
interpleader action and that the Court improperly failed to
provide the Insurers with an opportunity to present
evidence regarding the reasons for the delay. We therefore
vacate the District Court's dismissal based on laches and
remand for further proceedings. Finally, we conclude that
the Insurers did not waive their attorney-based privileges
and we therefore reverse the District Court's contrary
ruling.
I.
A.
U.S. Fire and North River are excess insurers of
Asbestospray Corporation and related entities (collectively,
4
"Asbestospray"), all of which now are bankrupt.
Asbestospray is a defendant in over 27,000 personal injury
suits pending in courts throughout the country. In addition
to the contingent liabilities posed by these 27,000 suits, the
Mayor and City Council of Baltimore ("Baltimore") have
obtained an $8.33 million judgment against Asbestospray
for reimbursement of costs incurred in removing asbestos
from public buildings in the City of Baltimore.
Asbestospray's sole remaining asset is the proceeds of the
insurance policies at issue here.
These insurance policies provided excess coverage of $5
million per year from 1971 to 1976 for a total of $25 million
in coverage. Because the policies are excess policies, the
coverage under them is triggered only if and when the
primary layer of coverage is exhausted. The primary layer of
coverage was exhausted in May 1995, at which point the
Insurers became obligated to defend Asbestospray in
asbestos-related lawsuits. The policies expressly provide
that defense litigation costs, including counsel fees, apply
against the policy limits.
Between May 1995 and June 13, 1997, the Insurers
disbursed over $21 million of the $25 million of the
aggregate coverage. The sum of $6.5 million was paid to
settle personal injury claims, while the sum of $9.2 million
was paid in legal defense costs. Settlements in principle,
agreed to but not paid as of June 13, 1997, totaled $5.39
million. The Insurers deposited this $5.39 million sum in
an escrow account administered by Asbestospray's national
coordinating defense counsel, Robert Brownson, Esq.
("Brownson"), and his law firm, Stich, Angell. Deducting
from the aggregate coverage of $25 million the sums
expended for settlements in fact and in principle, as well as
accumulated defense costs, $3.88 million in unexhausted
coverage remained as of June 13, 1997 to satisfy both the
pending personal injury claims and Baltimore's judgment
against Asbestospray.
B.
In 1984, Baltimore filed suit in Maryland state court
against Asbestospray (and more than 40 other asbestos
5
manufacturers), seeking to recover costs incurred in
removing asbestos from City-owned buildings. In 1992, a
jury returned a verdict in Baltimore's favor, and ultimately
the Maryland Court entered judgment against Asbestospray
for $8.33 million in compensatory damages. This award
was upheld on direct appeal, and in 1993, Baltimore served
writs of garnishment against the Insurers seeking recovery
against the policies at issue here. The writs directed the
Insurers as garnishees to "hold the property of .. .
[Asbestospray] subject to further proceedings in this Court."
The Insurers answered the writs and, among other things,
denied coverage for asbestos remediation claims of the type
upon which Baltimore's judgment was based.
In 1994, the Insurers moved the Maryland Court for
summary judgment on the ground that the policies do not
provide coverage for asbestos remediation claims. Instead of
ruling on the coverage issue, the Maryland Court entered a
default judgment against the Insurers as a sanction for
alleged discovery violations. The Insurers appealed, and in
August 1996, the Maryland Court of Appeals vacated the
default judgment and remanded the case to the trial court.
North River Ins. Co. v. Mayor & City Council of Baltimore,
343 Md. 34, 680 A.2d 480 (Md. 1996). The Maryland Court
subsequently denied the Insurers' motion for summary
judgment with respect to coverage.
From August 1996 to June 1997, the date this
interpleader action was filed, the Maryland garnishment
action was not actively litigated. In September 1998,
Baltimore moved the Maryland Court to enjoin plaintiffs
from paying their settlements in principle from the escrow
account. Pursuant to this motion, the Maryland Court has
ordered the Insurers not to pay any further proceeds from
the escrow fund to any Asbestospray claimant pending
resolution of Baltimore's claim in the Maryland Court.
C.
The Insurers commenced this statutory interpleader on
June 13, 1997, and in accordance with 28 U.S.C.
S 1335(a)(2) (1994), they filed an interpleader bond of $3.88
million, an amount which represented the proceeds of the
6
policies that either had not been paid out or that had not
been committed by way of settlements in principle. On
June 13, 1997, the District Court entered an order
(hereafter, the "June 13 Order") pursuant to 28 U.S.C.
S 2361 (1994):
restraining for a period of 20 days from the date hereof
(or until further order of this Court) all claimants from
instituting an action or further prosecuting any
existing action in any state court or in any Court of the
United States or in any other tribunal against the
United States Fire Insurance Company and North River
Insurance Company (the "Plaintiffs") seeking recovery
under policies issued by Plaintiffs to [Asbestospray].
By order dated August 1, 1997, the District Court
continued the injunction indefinitely.
On July 25, 1997, Baltimore filed an answer and
opposition to the interpleader on the grounds that: (1) the
amount of the interpleader bond was insufficient to confer
jurisdiction; (2) the action was equitably barred by laches;
(3) the action was barred by the doctrine of unclean hands;
and (4) the interpleader was brought to avoid litigation of
the garnishment action in the Maryland Court. The District
Court scheduled a hearing for July 30, 1997, at which the
District Court heard argument on whether it had
jurisdiction and whether the action was barred by laches.
The District Court did not rule on any of these matters but
accepted briefing and continued its injunction.
D.
On July 18, 1997, Weitz & Luxenberg filed a motion in
New York State court on behalf of one of its clients,
Frederick Whitaker ("Whitaker"), seeking to compel
payment of a $2 million settlement from the escrow fund.
On July 24, the New York Court ordered the funds to be
disbursed no later than July 31, 1997. Browning, acting as
escrow agent, declined to pay the amount despite the New
York Court order because (1) the Insurers instructed him
not to and (2) the June 13 Order arguably enjoined
disbursement from the escrow account.
7
On August 6, Weitz & Luxenberg moved the New York
Court to hold Browning in contempt if the settlement
proceeds were not paid by September 4, 1997. Browning
wrote a letter to the Insurers informing them of the
contempt motion and advising them that he planned to wire
the funds to Weitz & Luxenberg on September 3 unless the
Insurers obtained an order from the District Court directing
him not to do so. The Insurers did not obtain an Order by
the deadline set forth in the letter, and on September 3,
Browning wired $2 million from the escrow account to a
bank account held by Weitz & Luxenberg.
Later that same day, upon learning of the $2 million wire
transfer, the Insurers terminated the Stich, Angell firm as
escrow agent. The Insurers currently maintain control over
the remaining funds (the $5.39 million formerly held in the
escrow account, less the $2 million that was disbursed to
settle the Whitaker suit) and have posted an additional
interpleader bond of $3.39 million.
On September 8, the Insurers filed a motion seeking
clarification of the original restraining order. The District
Court ruled on the motion by order dated January 21, 1998
(hereafter, the "January 21 Order"). The District Court:
MODIFIED [the June 13 Order] to include within the
definition of "policies issued by the Plaintiffs to the
Insurers" any funds held in escrow or otherwise by
third parties, including funds in the escrow account
previously held by Stich, Angell, Kreidler, Brownson &
Ballou, P.C. as escrow holders.
The District Court then:
DECLARE[D] that the transfer of the above-referenced
funds to the law firm of Weitz & Luxenberg to settle the
action styled Whitaker v. Asbestospray, et al., Supreme
Court of New York, County of New York, Index No. 96-
116205 constituted a violation of this court's order[sic]
of June 13, 1997 and August 1, 1997.
The District Court did not impose sanctions or otherwise
penalize the asserted violation of the June 13 Order.
8
E.
The January 21 Order also addressed several
outstanding discovery matters. Prior to the issuance of the
January 21 Order, Baltimore and other defendants
requested discovery relating to the timing of thefiling of the
interpleader action. The Insurers objected to some of the
requests on the ground that they sought materials
protected by attorney-client and work product privileges.
The District Court rejected the Insurers' assertion of
privilege in its January 21 Order. The District Court ruled
that the Insurers waived their attorney-based privileges by
their assertedly untimely filing of the interpleader action:
[W]e find the plaintiffs by bringing this action waived
any attorney client privilege concerning why the action
was brought, its timing, the existence of any
garnishments against the fund, plaintiffs' own
calculations of projected liabilities of the fund, as well
as the transfer of insurance proceeds.
F.
After the District Court denied motions for
reconsideration of its January 21 Order, the parties
continued with discovery. On April 9, 1998, Baltimore
moved to dismiss the interpleader action. The sole ground
raised in Baltimore's moving papers was its contention that
the District Court lacked subject matter jurisdiction
because the interpleader bond was insufficient to cover the
amount of policy proceeds in controversy. On August 28,
the District Court dismissed the case based on (1) laches
and (2) the asserted insufficiency of the interpleader bond.
The Insurers appeal the August 28 Order, as well as the
District Court's rulings on their attorney-based privileges in
its January 21 Order. Brownson, Stich, Angell, Whitaker
and Weitz & Luxenberg appeal the District Court's
determination in its January 21 Order that the transfer
from the escrow fund violated the District Court's June 13
Order.
9
II.
A.
We first address whether we have jurisdiction over Stich,
Angell's1 appeal of the January 21 Order. We conclude that
we do not, and we therefore dismiss that appeal.
Stich, Angell appeals the January 21 Order which
purports to: (1) modify the June 13 Order and (2) declare
the $2 million distribution in violation of the June 13
Order. Stich, Angell first argues that we have jurisdiction to
hear its appeal pursuant to 28 U.S.C. S 1292(a)(1) (1994),
which provides for appellate jurisdiction over
"[i]nterlocutory orders of the district courts . . . granting,
continuing, modifying, refusing or dissolving injunctions, or
refusing to dissolve or modify injunctions, except where a
direct review may be had in the Supreme Court."
We do not have jurisdiction over Stich, Angell's appeal
under S 1292(a)(1). We recognize that the January 21 Order
purports to modify the June 13 Order, which by virtue of
its duration was converted into a preliminary injunction,
SEC v. Black, 163 F.3d 188, 194 (3d Cir. 1998), and that
therefore it is plausible to assert jurisdiction under
S 1292(a)(1). We reject S 1292(a)(1) as a jurisdictional basis,
however, because the January 21 Order, despite some of its
language, does not in fact modify the June 13 Order.
It is well settled that when determining our jurisdiction,
we must examine the substance of the order rather than
merely its language. Cromaglass Corp. v. Ferm , 500 F.2d
601, 604 (3d Cir. 1974) (en banc); Gregory v. Depte, 896
F.2d 31, 38 n.14 (3d Cir. 1990) (Becker, J., concurring in
part and dissenting in part) ("[I]t is important to note that
the labels attached by the district court to its order are not
determinative"). Here, we conclude that the January 21
Order did not in fact modify the June 13 Order but instead
clarified that, in the District Court's view, the June 13
Order applied to the funds held in escrow by Stich, Angell
_________________________________________________________________
1. We refer to the Appellants Stich, Angell, Brownson, Whitaker and
Weitz & Luxenberg collectively as Stich, Angell unless the context
requires otherwise.
10
and thus prohibited their transfer to Weitz & Luxenberg. If
the January 21 Order is not interpreted in this way as a
clarification of the June 13 Order but is instead construed
as a modification of that order (broadening it so as to make
it applicable for the first time to the funds held in escrow),
the District Court plainly would have had no basis for
declaring that the prior transfer of funds to Weitz &
Luxenberg was in violation of the earlier order. We
recognize that the District Court did use the term
"MODIFIED" in the June 13 Order, but we attribute this to
a mistake in draftsmanship. It does not persuade us that
the June 13 Order was in substance a modification rather
than a clarification or interpretation, and our appellate
jurisdiction under 28 U.S.C. S 1292(a)(1) does not extend to
orders, such as the January 21 Order, that interpret or
clarify injunctions. Motorola, Inc. v. Computer Displays Int'l,
Inc., 739 F.2d 1149, 1155 (7th Cir. 1984).
Stich, Angell next argues that we have jurisdiction under
the "collateral order" doctrine. This doctrine is a narrow
exception to the final judgment rule under which a"small
class" of collateral orders are deemed final even though
they do not terminate the underlying litigation. Christy v.
Horn, 115 F.3d 201, 203-204 (3d Cir. 1997) (quoting Cohen
v. Beneficial Indus. Loan Co., 337 U.S. 541 (1949)). We have
jurisdiction to review a collateral order only when the order:
(1) finally resolves a disputed question; (2) raises an
important jurisprudential issue distinct from the merits of
the case; and (3) is effectively unreviewable on appeal from
a final judgment. Christy, 115 F.3d at 203-204. Here, we
see no reason why the January 21 Order would be
unreviewable on appeal from an order fully disposing of the
case. Nor do we agree with Stich, Angell's assertion that the
issues raised by its appeal, which chiefly concern the
interpretation of an order clarifying a preliminary
injunction, are so important jurisprudentially that we
should disregard the normal rule of finality. Compare
Christy, 115 F.3d at 205 (appeal of order holding habeas
corpus petition in abeyance pending exhaustion of
constitutional claims in state court raised important
jurisprudential issues in light of conflicting case law and
"important nature of capital habeas cases in general"). The
parties raise no other bases for appellate jurisdiction, and
11
we discern no other basis ourselves. Accordingly, we
dismiss Stich, Angell's appeal of the January 21 Order.
B.
1. Laches
Next, we address the District Court's dismissal of the
interpleader action based on laches. Because we conclude
that the record was not sufficiently developed with respect
to the possible justifications for the Insurers' delay in filing
the interpleader, and further because we conclude that the
District Court erred in calculating the period of delay, we
vacate the District Court's order dismissing the interpleader
and remand for further proceedings.
"Both the length of delay and the existence of prejudice
are questions of fact to be reviewed by this court under the
``clearly erroneous' standard." Churma v. United States Steel
Corp., 514 F.2d 589, 593 (3d Cir. 1975); see also EEOC v.
Great Atlantic & Pacific Tea Co., 735 F.2d 69, 84 (3d Cir.
1984). Whether delay is "inexcusable" on the facts
presented is a conclusion of law over which our review is
plenary. Great Atlantic, 735 F.2d at 81. If we agree with the
district court's legal conclusion that a given historical delay
is inexcusable, we review the court's assessment of the
equities for abuse of discretion. Id.; see also Churma, 514
F.2d at 593
Because interpleader is an equitable proceeding, it is
subject to dismissal based on equitable doctrines such as
laches. In re Bohart, 743 F.2d 313, 325 (5th Cir. 1984). In
this regard, it has ". . . been often stated-- although rarely
held -- that interpleader is properly denied when the
stakeholder is . . . guilty of laches." Id. at 326 n.11 (quoting
3A Moore's Federal Practice P 22.16[1] (1984)); see also 7
Wright, Miller & Kane, Federal Practice & Procedure: Civil
2d S 1709 (West 1986) ("[C]ourts are reluctant to refuse
interpleader [for laches] since the inconvenience to the
stakeholder and the courts that would result if multiple
litigation, and possibly multiple liability, came to pass are
at least as troublesome as rewarding the stakeholder's
questionable conduct.").
12
The party asserting laches as a defensive bar must
establish (1) an inexcusable delay in bringing the action
and (2) prejudice. Great Atlantic, 735 F.2d at 81; Churma,
514 F.2d at 593. To establish prejudice, the party raising
laches must demonstrate that the delay caused a
disadvantage in asserting and establishing a claimed right
or defense; the mere loss of what one would have otherwise
kept does not establish prejudice. In re Bohart, 743 F.2d at
327 (reversing district court's dismissal of interpleader
based on laches).
Here, the District Court held as a matter of law that the
Insurers' delay in filing the interpleader action was
unreasonable and prejudicial to potential claimants, and
the Court accordingly dismissed the interpleader action
with prejudice. Although laches was raised as an
affirmative defense in Baltimore's answer to the
interpleader, the only issue raised by Baltimore in its
motion to dismiss -- and therefore the only matter as to
which the Insurers were on proper notice to defend--
pertained to the asserted insufficiency of the interpleader
bond. Moreover, because the motion to dismiss was
couched solely in terms of the jurisdictional insufficiency of
the interpleader bond, the Insurers were not provided an
opportunity to present reasons for the delay infiling or to
conduct discovery into the prejudice that Baltimore alleged
it suffered.
Against this procedural canvas, the District Court held
that "as a matter of law . . . the [Insurers] knew or should
have known that the available insurance pool was
insufficient as early as February 22, 1993," and that
therefore they had "a duty to file the interpleader, if they
were to do it at all," at that time. The Insurers' coverage
under their excess policies, however, was not triggered until
May 1995, when the primary layer of coverage was
exhausted. The District Court erred in charging the
Insurers with inexcusable delay during the period from
February 1993 to May 1995, a time when the Insurers'
duty to defend and indemnify had not been activated as a
matter of law.
Furthermore, because the District Court ruled on an
inadequate record, it did not have an opportunity to weigh
13
the Insurers' explanation for at least a portion of the delay
after May 1995. When the policies were triggered in 1995,
they were subject to Baltimore's valid default judgment
against them entered by the Maryland Court as a discovery
sanction. The Insurers claim that filing an interpleader
when there existed a valid judgment against the policies
would have subjected the claim to dismissal and charges of
forum shopping. See, e.g., B.J. Van Ingen & Co. v. Connolly,
225 F.2d 740, 741 (3d Cir. 1955) (affirming dismissal of
interpleader: "[T]his interpleader is an attempt to obtain in
a federal forum a separate adjudication of a controversy
which has arisen in the attempted enforcement of a decree
of a state court"). On remand, the District Court should
assess the credibility of the Insurers' explanation in
determining whether the delay was inexcusable.2
The District Court also found that Baltimore and the
other potential claimants against the res were prejudiced
because the insurance proceeds were "dissipated" by the
Insurers' practice of settling claims before the interpleader
was filed, thereby leaving an insufficient fund to pay the
remaining claims. But see In re Bohart, 743 F.2d 313 (5th
Cir. 1984) (rejecting similar claim of prejudice and reversing
district court's dismissal of statutory interpleader based on
laches). As we mention above, the District Court did not
receive briefing from the parties or permit discovery on the
issue of prejudice. Accordingly, we vacate the District
Court's finding of prejudice and remand so that a more
complete record on this issue may be developed.3
_________________________________________________________________
2. We note that, should the District Court credit the Insurers'
explanation, the seven-month period from the time of vacatur to the
commencement of the interpleader does not appear on its face to
constitute an unreasonable delay. Cf. Great Atlantic, 735 F.2d at 78-85
(reversing district court's finding of inordinate delay despite three
multi-
year long gaps in proceedings).
3. Baltimore also urges us to affirm the District Court based on the
doctrine of unclean hands. We agree with the Insurers that the District
Court's dismissal was not based on unclean hands and that the
reference to the doctrine in the District Court's opinion was intended
instead to provide an example of the type of equitable considerations
that may, in general, justify the dismissal of an interpleader action.
14
2. The Amount of the Interpleader Bond
The District Court rested its dismissal on the alternative
basis that the interpleader bond was insufficient because it
did not cover the entire proceeds of the insurance policies
-- $25 million -- or even the funds deposited in the escrow
account. However, because the original interpleader bond of
$3.88 million deposited with the District Court represents
the amount of proceeds reasonably in controversy, we
conclude that the District Court erred in dismissing the
interpleader based on the alleged insufficiency of the bond.
A proper deposit or bond is a jurisdictional prerequisite
to bringing an interpleader. 28 U.S.C. S 1335(a)(2) (1994); In
re Sinking of M/V Ukola, 806 F.2d 1, 5 (1st Cir. 1986); 7
Wright, Miller & Kane, Federal Practice and Procedure: Civil
2d S 1716 (West 1986). The stakeholder invoking
interpleader must deposit the largest amount for which it
may be liable in view of the subject matter of the
controversy. 28 U.S.C. S 1335(a)(2) (1994); CNA Ins. Cos. v.
_________________________________________________________________
In the event that the unclean hands theory is pressed on remand, we
note that the record as it presently stands contains insufficient evidence
to establish unclean hands. To the extent the District Court found
inequitable conduct that might be equated with "unclean hands," its
finding was based on the assertedly improper delay and the allegedly
improper decision to "dissipate" the insurance policy proceeds prior to
filing the interpleader. We have vacated the District Court's finding of
unreasonable delay, and note that even if the District Court finds on
remand that the Insurers unreasonably delayed for purposes of
determining whether laches should bar the action, it does not
necessarily follow that the Insurers were guilty of unclean hands by
acting fraudulently, unconscionably or in bad faith. See S&R Corp. v.
Jiffy Lube Int'l, Inc., 968 F.2d 371, 377 n.7 (3d Cir. 1992). Furthermore,
the "dissipation" identified by the District Court, even if proven true,
would not, without a further finding of fraud, unconscionability, or bad
faith, constitute unclean hands. See Douglas-Guardian Warehouse Corp.
v. Ramy Seed Co., 271 F.2d 24, 28 (8th Cir. 1959) (plaintiff had "clean
hands" even though the property he tendered to the court was
insufficient to satisfy all the demands of the interpleaded claimants).
15
Waters, 926 F.2d 247, 249-50 n.6 (3d Cir. 1991); M/V
Ukola, 806 F.2d at 5.4
Here, the Appellees claim entitlement to the entire $25
million in insurance proceeds, and they therefore argue
that this amount should be deposited with the Court. The
determination of the appropriate deposit, however, is not a
mechanical process under which the court uncritically
searches for the highest amount claimed by the adverse
claimants and requires that amount to be deposited; rather,
the determination "depends upon the person who invokes
the interpleader and what he asserts to be the subject
matter of the controversy." M/V Ukola, 806 F.2d at 5.
Amounts that are not realistically within the scope of the
interpleader as pleaded are not required to be deposited or
bonded to sustain federal jurisdiction. Id.; 7 Wright, Miller
& Kane, Federal Practice and Procedure: Civil 2d S 1716
(West 1986) ("[T]he court will have to inquire into the
underlying merits of a claim to determine proper amount of
the deposit or bond.").
In this case, the sum put into controversy by the
interpleader complaint was $3.88 million -- the
unexhausted proceeds of the policy. See Aetna Cas. &
Surety Co. v. Ahrens, 414 F. Supp. 1235, 1254 (S.D. Tex.
1975) (where an interpleader involves liability insurance
proceeds, the money or property in dispute is the
unexhausted policy limits and plaintiff need only deposit
unexhausted policy limits at the time of interpleader). In
the absence of a claim of collusion or fraud on the part of
_________________________________________________________________
4. Even if the District Court were correct that the interpleader bond of
$3.88 million was insufficient, it erred in dismissing the complaint
without affording an opportunity to cure. "The law is clear . . . that
[the
stakeholder] [is] permitted to cure this defect by making an additional
deposit with the court registry." Waters, 926 F.2d at 250 n.6.
Indeed, the Insurers have bonded the sum that remains in the former
Stich, Angell escrow and placed it under the District Court's
jurisdiction.
Although, as we explain below, we conclude that the Insurers need not
have deposited sums already committed to settlements in principle to
satisfy the jurisdictional requirements of the interpleader statute, that
they have done so points to the error of the District Court's dismissal
without affording the Insurers the opportunity to cure.
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the Insurers in settling claims prior to the commencement
of the interpleader -- and no such claim is before us --
there is no merit to the Appellees' claims to sums beyond
the $3.88 million that remains in unexhausted policy
proceeds.5 The sums that have been paid out or
contractually committed to settle ongoing, pre-interpleader
lawsuits from other state courts were not realistically part
of the interpleader action as it was pleaded, and therefore
these sums were not required to be deposited with the
court to sustain federal jurisdiction.
We note as well that the District Court's expansive view
of its interpleader jurisdiction is inconsistent with the
limited nature of the interpleader device. An injunction
issued pursuant to 28 U.S.C. S 2361 "must not be
overbroad." 7 Wright, Miller & Kane, Federal Practice and
Procedure: Civil 2d S 1717 (West 1986). The injunction
cannot extend to litigation involving the fund that is not
within the subject matter of the interpleader. State Farm
Fire & Casualty Co. v. Tashire, 386 U.S. 523, 535 (1967)
("[I]nterpleader was never intended . . . to be an all-purpose
``bill of peace.' "); Commercial Sec. Bank v. Walker Bank &
Trust Co., 456 F.2d 1352, 1355-56 (10th Cir. 1972)
(injunction exceeded permissible scope when it purported to
enjoin litigation beyond the res); Knoll v. Socony Mobil Oil
Co., 369 F.2d 425, 429 (10th Cir. 1966) (injunction barring
litigation involving title to oil-producing land void for lack of
jurisdiction where the interpleaded fund consisted solely of
disputed revenues produced by sale of oil taken from the
land: "This was an in personam exercise of jurisdiction. In
an interpleader action, however, in personam jurisdiction
extends only to the fund deposited with the court"),
_________________________________________________________________
5. Our mandate does not prevent Baltimore or the other Appellees from
seeking in other fora to recover from the Insurers personally based on
other legal theories, such as the theory that they violated the Maryland
Court's writ of garnishment. Our statement regarding the viability of the
Appellees' claims to sums beyond the unexhausted policy proceeds is
limited to the context of this interpleader action alone. Cf. Douglas-
Guardian, 271 F.2d at 28 ("In the event that any of the defendants have
claims against the plaintiff, as distinguished from claims to this
property, such claims can be asserted; however, plaintiff should not be
required to give a bond to cover such claims.").
17
overruled on other grounds by Liberty Nat. Bank & Trust Co.
v. Acme Tool Div., 540 F.2d 1375, 1381 (10th Cir. 1976);
see Continental Illinois Nat. Bank & Trust Co. v. R.L. Burns
Corp., 552 F. Supp. 113, 114 (N.D. Ill. 1982) ("Subject
matter jurisdiction under S 1335 is limited to the resolution
of conflicting claims to the fund in controversy.").
Because the injunction available under S 2361 is an
exception to the generally applicable rule barring federal
injunctions of state court proceedings, 28 U.S.C. S 2283
(1994), federal courts should defer to parallel state
proceedings that pre-date the interpleader, especially
where, as here, the proceedings have resulted in judgments
(or settlements in principle). See NY Life Distribs., Inc. v.
Adherence Group, Inc., 72 F.3d 371, 381 (3d Cir. 1995)
(district court retains equitable discretion to determine
whether "the issues raised in an interpleader action may be
better resolved in a state court"); see also 7 Wright, Miller
& Kane, Federal Practice and Procedure: Civil 2d S 1717
(West 1986). The friction between the New York State Court
and the District Court in this case points out the
undesirable consequences of an interpleader injunction
that is overly broad and unduly interferes with parallel
state-court proceedings.
The District Court erred when it concluded that the pre-
interpleader settlements were part of the res properly
subject to its interpleader jurisdiction, and therefore erred
in dismissing the interpleader based on the alleged
insufficiency of the interpleader bond. Accordingly, we
vacate the District Court's order dismissing the interpleader
for lack of jurisdiction.
3. The District Court's Privilege Rulings
Finally, the Insurers object to the District Court's ruling,
in its January 21 Order, that the Insurers waived the
attorney-client and attorney work product privileges by
allegedly placing privileged material directly at issue in this
suit. We agree with the Insurers that the District Court
erred in so ruling.
A party may waive attorney-based privileges by asserting
"claims or defenses that put his or her attorney's advice in
18
issue in the litigation." Rhone-Poulenc Rorer, Inc. v. Home
Indem. Co., 32 F.3d 851, 863 (3d Cir. 1994). A party waives
the privilege only when he or she "has made the decision
and taken the affirmative step in the litigation to place the
advice of the attorney in issue." Id. (citing as an example of
waiver a defendant who asserts reliance on advice of
counsel as a defense); see also Livingstone v. North Belle
Vernon Borough, 91 F.3d 515, 537 (3d Cir. 1996) (assertion
of defense directly implicating advice of counsel waives
attorney-client privilege as to that issue), cert. denied, 520
U.S. 1142 (1997).
In this case, the Insurers did not assert any claim or take
any affirmative step that placed the advice of counsel at
issue. Rather, they argued based on the record and in
defense of a laches claim that the delay in filing the
interpleader was objectively justified. Neither the fact that
the Insurers raised this argument nor the timing of the
interpleader action can be interpreted as an affirmative
waiver of the attorney-based privileges. We reverse the
District Court's contrary ruling.
III.
For the foregoing reasons, we dismiss Stich, Angell's
appeal of the January 21 Order for lack of jurisdiction,
vacate the August 28 Order dismissing the interpleader for
laches and lack of subject matter jurisdiction, reverse the
January 21 Order insofar as it declared that the Insurers
waived the attorney-client and work product privileges, and
remand for further proceedings consistent with this
opinion.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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