Strickland Ex Rel. Steed v. Hughes

160 S.E.2d 313 (1968) 273 N.C. 481

Ronald Wayne STRICKLAND, by his Next Friend, W. H. Steed
v.
Leslie HUGHES, Original Defendant, The Aetna Casualty & Surety Company, Additional Defendant.

No. 437.

Supreme Court of North Carolina.

April 17, 1968.

Charles F. Lambeth, Jr., Thomasville, for plaintiff appellant.

Charles H. McGirt, of Walser, Brinkley, Walser & McGirt, Lexington, for additional defendant, Aetna Casualty and Surety Co., Intervener.

HUSKINS, Justice.

Only parties of record to a suit have a standing therein which will enable them to take part in or control the proceedings. If they desire to seek relief with respect to the matters involved they must either obtain the status of parties in the suit or, in proper instances, institute an independent action. Thus a person not originally a party may be permitted to become a party by his own intervention. "In legal terminology, ``intervention' is the proceeding by which one not originally a party to an action is permitted, on his own application, to appear therein and join one of the original parties in maintaining the action or defense, or to assert a claim or defense against some or all of the parties to the proceeding as originally instituted. Stated in another way, ``intervention' is the admission by leave of court of a person not an original party to the pending legal proceeding, by which such person becomes a party thereto for the protection of some right or interest alleged by him to be affected by such proceeding." 39 Am.Jur., Parties § 55. See also Rocca v. Thompson, 223 U.S. 317, 32 S. Ct. 207, 56 L. Ed. 453, affirming 157 Cal. 552, 108 P. 516, 37 L.R.A., N.S., 549; Gorham v. Hall, 172 Ark. 744, 290 S.W. 357.

When a complete determination of the controversy cannot be made without the presence of a party, the court must cause it to be brought in because such party is a necessary party and has an absolute right to intervene in a pending action. G. C. § 1-73; Garrett v. Rose, 236 N.C. 299, 72 S.E.2d 843. Hence, refusal to permit a necessary party to intervene is error. Simms v. Sampson, 221 N.C. 379, 20 S.E.2d 554; Temple v. Eades Hay Co., 184 N.C. 239, 114 S.E. 162. When a person is so vitally interested in the controversy that a valid judgment cannot be rendered in the action completely and finally determining the controversy without his presence, such person is a necessary party to the action. Garrett v. Rose, supra; Colbert v. Collins, 227 N.C. 395, 42 S.E.2d 349; Jones v. Griggs, 219 N.C. 700, 14 S.E.2d 836.

The term "proper party" to an action or proceeding means "a party who has an interest in the controversy or subject matter which is separable from the interest of the other parties before the court, so that it may, but will not necessarily, be affected by a decree or judgment which does complete justice between the other parties." 67 C.J.S. Parties § 1. It is ordinarily within the discretion of the court to permit proper parties to intervene. Childers v. Powell, 243 N.C. 711, 92 S.E.2d 65.

Before a third party will be permitted to become a party defendant in a pending action, he must show that he has some legal interest in the subject matter of the litigation. "His interest must be of such direct and immediate character that he will either gain or lose by the direct operation and effect of the judgment, and it must be involved in the subject matter of the action. One whose interest in the matter in litigation is not a direct or substantial interest, but is an indirect, inconsequential, or a contingent one cannot claim the right to defend. 39 Am.Jur. 900, 935." Mullen v. Town of Louisburg, 225 N.C. 53, 56, 33 S.E.2d 484, 486. See also, Griffin & Vose, Inc. v. Non-Metallic Minerals Corp., 225 N.C. 434, 35 S.E.2d 247.

Does Aetna presently have such a direct and immediate interest in the subject matter of this litigation that it will either gain or lose by the direct operation and effect of any judgment Strickland might recover against Hughes? Answer to this question requires consideration of the following facts and circumstances and pertinent legal principles applicable to them.

The insuring agreements of Aetna's policy of compulsory liability insurance, issued by it under the assigned risk plan pursuant to G.S. § 20-279.34, obligated it "to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages" by reason of personal injuries or property damage caused by accident and arising out of the ownership, maintenance or use of the insured automobile.

In obedience to the requirements of G.S. 20-279.21(b) (2), this policy insures the person named therein and any other person, as insured, using the automobile with the permission of such named insured, against loss from the liability imposed by law for damages arising out of the ownership, maintenance or use of such motor vehicle.

The policy is also subject to the following provisions contained in G.S. 20-279.21(f) (1):

"The liability of the insurance carrier with respect to the insurance required by this article shall become absolute whenever injury or damage covered by said motor vehicle liability policy occurs; said policy may not be cancelled or annulled as to such liability by any agreement between the insurance carrier and the insured after the occurrence of the injury or damage; no statement made by the insured or on his behalf and no violation of said policy shall defeat or void said policy."

The policy contained the following "no action" clause:

"No action shall lie against the Company unless, as a condition precedent thereto, the Insured shall have fully complied with all the terms of this policy, nor until the amount of the Insured's obligation to pay shall have been finally determined either by judgment against the Insured after actual trial or by written agreement of the Insured, the claimant and the Company.

"Any person or organization or the legal representative thereof who has secured such judgment or written agreement shall thereafter be entitled to recover under this policy to the extent of the insurance afforded by this policy. Nothing contained in this policy shall give any person or organization any right to join the Company as a co-defendant in any action against the Insured to determine the Insured's liability."

This "no action" clause, insofar as contrary to G.S. § 20-279.21(f) (1), quoted above, is unenforceable as to the coverage within compulsory limits provided by assigned risk policies. If the terms of the policy and the statute conflict, the statute controls. Howell v. Travelers Indemnity Co., 237 N.C. 227, 74 S.E.2d 610. Even so, this clause is valid when asserted as a defense to a judgment obtained against an insured by collusion. Jones v. State Farm Mutual Automobile Insurance Co., 270 N.C. 454, 155 S.E.2d 118. The insurer's liability cannot be predicated on a judgment obtained against the insured by collusion. 4 Strong's N.C. Index 2d, Insurance, § 106; Jones v. Insurance Co., supra.

So in this case, plaintiff initially has no right to maintain an action against Aetna. He can do so only after the liability of Hughes to plaintiff has been determined by judgment. Jones v. Insurance Co., supra. When such judgment is obtained it will constitute a final adjudication and determination of the legal liability of Hughes to the plaintiff, unless and until it is set aside for fraud, collusion, excusable neglect, or other cause recognized by law as sufficient. Jones v. Insurance Co., supra; Sanders v. Chavis, 243 N.C. 380, 90 S.E.2d 749.

Furthermore, when the insurer is later sued by the injured person, if the insurer had a right to defend the action against the insured, had timely notice of such action, and defends or elects not to defend, the judgment in such case, in the absence of fraud or collusion, is generally binding upon the insurer as to issues which were or might have been litigated therein. 7 Am.Jur.2d, Automobile Insurance § 227, and cases cited. Not so, however, when the judgment is obtained by fraud and collusion. There is authority to the effect that although the insurer defended the action between its insured and an injured person, the result of that suit does not bar the insurer from setting up any matter constituting a defense which was not necessarily determined in the original action. Sweeney v. Frew, 318 Mass. 595, 63 N.E.2d 350; 7 Am.Jur.2d, supra. We emphasize in this connection that, under the terms of its policy, Aetna's obligation to defend this action against the named insured, or any other person using the vehicle with the permission of the named insured, is absolute. It becomes absolute when the allegations of the complaint bring the claim within the coverage of the policy. Fireman's Fund Ins. Co. v. North Carolina Farm Bureau Mutual Ins. Co., 269 N.C. 358, 152 S.E.2d 513. Aetna allegedly defends under a full reservation of rights to deny coverage. Thus, defense of the action in obedience to its contractual obligations does not estop Aetna to assert fraud and collusion in any subsequent action against it based upon a judgment thus obtained against its insured. Such defense could not be raised and determined in the original action because defendant refused to raise it in his answer.

Judgments of any court may be impeached for fraud or collusion by strangers to them who, if the judgments were given full faith and credit, would be prejudiced in regard to some pre-existing right. Freeman on Judgments, 5th ed., Vol. 1, §§ 318, 319. "* * * [W]henever a judgment or decree is procured through the fraud of either of the parties, or by the collusion of both, for the purpose of defrauding some third person, he may escape from the injury thus attempted by showing, even in a collateral proceeding, the fraud or collusion by which the judgment or decree was obtained." Freeman on Judgments, 5th ed., Vol. 1, § 318, and cases cited.

"It is a well-settled general rule that whenever the rights of third persons are affected they may collaterally attack a judgment for fraud committed by one party, or for collusion of both parties." 30A Am.Jur., Judgments § 879, where numerous cases are cited in support of the text.

Where the rights of persons not parties or privies to a proceeding are adversely affected by a judgment, it is generally held that such persons are allowed to impeach the judgment whenever its enforcement is attempted against them. 30A Am. Jur., Judgments § 849, citing Reynolds v. Lloyd Cotton Mills, 177 N.C. 412, 99 S.E. 240, 5 A.L.R. 284.

Fraud has been regarded as extrinsic and thus subject to collateral attack "where it operates upon matters pertaining, not to the judgment itself, but to the manner in which it is procured." 30A Am.Jur., Judgments § 784. Thus it was held to be extrinsic fraud where one, alleging injury as a result of negligence, feigned paralysis and by collusion between himself, his physician, and members of his family, deceived the court and jury and received an award of damages on the theory that he was paralyzed. Chicago Rock Island and P. R. Co. v. Callicotte (CA 8) 267 F. 799, 16 A.L.R. 386, cert. den. 255 U.S. 570, 41 S. Ct. 375, 65 L. Ed. 791.

In Brune v. McDonald (Pacific Indemnity Co. Intervener), 158 Or. 364, 75 P.2d 10, it was held that a liability insurer was not entitled to intervene, in an action by a guest passenger against the driver for personal injuries negligently inflicted, and enjoin prosecution of the case on the ground that plaintiff and defendant were conspiring to defraud the insurer. The court stated that the direct legal operation of the judgment would not cause intervener to gain or lose anything. The court further observed that intervener raised an entirely new and different issue and stated: "``The courts have always striven to maintain the integrity of the issues raised by the original pleadings, and to keep newly admitted parties within the scope of the original suit. * * * The injection of an independent controversy by intervention is improper.'"

It was held in Bertinelli, et al. v. Galoni, 331 Pa. 73, 200 A. 58, that an insured defendant who fraudulently colludes with a plaintiff in obtaining a judgment against himself cannot escape from the judgment which he aided in bringing about; but when claim is asserted against the insurer to collect the amount of such a judgment the trial court must afford the insurer the fullest opportunity to establish the collusion and to establish the failure of the insured to follow the course of conduct which the insurance contract required of him.

In Renschler v. Pizano, 329 Pa. 249, 198 A. 33, it was held that a judgment recovered against an insured by an injured party is conclusive only in the absence of fraud in a subsequent action by the injured party against the insurance carrier. "* * * [T]he defense of fraud is always available to the indemnitor, the judgment against the indemnitee being conclusive only in the absence of fraud." Petition by insurer to intervene for the purpose of moving to set aside the fraudulent judgment was denied.

In Corridan v. Rose, 137 Cal. App. 2d 524, 290 P.2d 939, it was held error to permit defendants' liability insurer to intervene and take part in the trial of an action by an infant plaintiff against his uncle and grandfather, the insurer claiming collusion and lack of defense on part of defendants.

In Bradford v. Kelly, 260 N.C. 382, 132 S.E.2d 886, plaintiff's insurer sought to intervene in order to plead a release in favor of its insured which otherwise would not be set up. Held: "It is the rule with us that in an action for damages founded upon the alleged negligence of the insured, his liability insurance carrier is not a proper party defendant," and insurer does not have such an interest in the subject matter of the litigation as to constitute it a necessary party. Motion to intervene was denied. Accord, Taylor v. Green, 242 N.C. 156, 87 S.E.2d 11.

In light of these authorities, we are of the opinion that Aetna is neither a necessary nor a proper party. It does not presently have such a direct and immediate interest in this action that it will either gain or lose by the direct operation and effect of any judgment Strickland might recover against Hughes. Aetna's interest is indirect and contingent. If allowed to intervene, the integrity of the issues raised by the original pleadings cannot be maintained. A new and different issue of fraud and collusion will be raised by intervention. The trial court will be faced with an anomaly wherein Hughes and his counsel furnished by Aetna admit he was driving the automobile while at the same time the Aetna through different counsel denies it. To insure a more orderly trial of cases of this kind and preserve the practice and procedure heretofore followed in North Carolina, the intervention herein sought should be denied. Notwithstanding the provisions of G.S. § 20-279.21(f) (1), any judgment recovered against an insured by an injured third party is conclusive in a subsequent action by the injured party against insured's liability carrier only in the absence of fraud. Collusion is fraud. This statute was not intended to compensate an insured for injury and damage negligently inflicted upon himself. "The primary purpose of compulsory motor vehicle liability insurance is to compensate innocent victims who have been injured by the negligence of financially irresponsible motorists." (Emphasis ours). Nationwide Mutual Ins. Co. v. Roberts, 261 N.C. 285, 134 S.E.2d 654.

What we have said here is without prejudice to the parties at the trial. The case is still in the pleadings stage. The evidence may not support the allegations. We simply hold that under the circumstances here alleged Aetna is not entitled to intervene but may, in a subsequent action against it, plead the defense of fraud and collusion incident to the manner in which judgment is obtained by Strickland against Hughes.

The order allowing Aetna to intervene was improvidently entered and is

Reversed.