United States v. 2009-10-28 | 07-17383 | WESTCHESTER FIRE V. NORTHWEST AIRLINES | precedential |…

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
 WESTCHESTER FIRE INSURANCE
COMPANY,
Plaintiff-Appellee, No. 07-17383
NORTHWEST AIRLINES, INC., D.C. No. Intervenor-Appellant,  CV-05-01417-PMP
v. OPINION
PHIL MENDEZ, doing business as
Professional Aircraft Line Service,
Defendant. 
Appeal from the United States District Court
for the District of Nevada
Philip M. Pro, District Judge, Presiding
Argued and Submitted April 17, 2009
San Francisco, California
Filed October 28, 2009
Before: Dorothy W. Nelson, Marsha S. Berzon and
Richard R. Clifton, Circuit Judges.
Opinion by Judge Clifton
14607

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COUNSEL
Jeffrey A. Eyers and Jeffrey A. Ehrich (argued), Leonard
Street and Deinard, Minneapolis, Minnesota; David N. Fred-
erick and Charles H. McCrea, Lionel Sawyer & Collins, Las
Vegas, Nevada, for the intervenor-appellant.
Erin Fury Parkinson (argued) and Margaret Diamond,
McGlinchey Stafford, New Orleans, Louisiana; Thomas J.
Lincoln, Nicholas B. Salerno, and James M. Barrington, Lin-
coln, Gustafson & Cercos, Las Vegas, Nevada, for the
plaintiff-appellee.
OPINION
CLIFTON, Circuit Judge:
Westchester Fire Insurance Company brought a declaratory
relief action against Phil Mendez, its insured policyholder
under a commercial general liability insurance policy. West-
chester contended that it had no obligation to defend or
indemnify Mendez against a certain claim because he failed
to give proper notice to the insurance company of the claim.
The injured party, Northwest Airlines, whose airplane was
allegedly damaged by one of Mendez’s employees, intervened
in the action. The district court entered default against
Mendez for repeatedly failing to appear for his deposition.
Based on that default, the court entered a default judgment in
favor of the insurance company, giving Westchester the dec-
laration that it sought. Northwest appeals, contending that it
should have been permitted to defend against the declaratory
relief action on its own. We agree, vacate the default judg-
ment, and remand for further proceedings.
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I. Background
Defendant Phil Mendez owned and operated an aircraft
maintenance business under the name Professional Aircraft
Line Services (“PALS”).1 Mendez provided maintenance ser-
vices for aircraft at the McCarran International Airport in Las
Vegas. Northwest Airlines was one of his customers, under a
contract that required Mendez to purchase and maintain com-
mercial general liability insurance.
Mendez was insured under an Airport Owners and Opera-
tors General Liability Policy issued by Westchester. As is
commonly the case, the policy provided that Mendez was
required to give prompt notice of any possible claim:
You must see to it that we are notified as soon as
practicable of an “occurrence” or an offense which
may result in a claim. . . If a claim is made or “suit”
is brought against any insured, you must (1) Immedi-
ately record the specifics of the claim or “suit” and
the date received; and (2) Notify us as soon as practi-
cable. . . . You and any other involved insured must:
(1) Immediately send us copies of any demands,
notices, summonses or legal papers received in con-
nection with the claim or “suit” . . . .
This action arises out of an incident on February 6, 2002 in
which an aircraft owned by Northwest sustained substantial
damage when it rolled down an embankment at McCarran
Airport. A Mendez employee was in the cockpit at the time
of the incident. Mendez did not report the incident to West-
chester.
A few months later, in July 2002, Northwest, through its
1This factual narrative is primarily drawn from the order entered by the
district court on November 5, 2007. For clarity, Mendez and PALS will
both be referred to here as “Mendez.”
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counsel and its own insurer, sent a letter to Mendez, notifying
him of Northwest’s claim against Mendez and requesting that
Mendez forward the correspondence to his insurer. Despite
Northwest’s request, Mendez did not notify Westchester.
More than a year later and more than twenty months after
the plane was damaged, in November 2003, Northwest
directly notified Westchester of the episode and of North-
west’s claim against Mendez. This was the first time West-
chester had been informed of the incident.
Westchester’s claims agent, Ace USA, tried several times
to get in touch with Mendez, requesting that Mendez contact
Westchester and reminding Mendez of his obligations as the
insured under the policy. At one point, in February 2004,
Mendez contacted Ace and indicated he would provide all
documents in his possession relating to the claim. When it had
not received the material by May 2004, Ace contacted
Mendez by phone. He again agreed to provide all relevant
documents, including material from the Federal Aviation
Administration allegedly absolving Mendez of any liability.
He did not follow through on that promise, however. Despite
efforts by Ace to follow up, Mendez had no further contact
with Ace and never provided the materials.
In November, 2004, Northwest’s insurer notified Ace that
Northwest had filed suit against Mendez in Minnesota and
that Mendez was in default in that action. Shortly thereafter,
Ace, on Westchester’s behalf, issued a denial of coverage let-
ter to Mendez based on Mendez’s failure to cooperate and
failure to notify Westchester or Ace of the lawsuit. The letter
was hand delivered to and acknowledged by Mendez on
November 29, 2004.
Northwest obtained a default judgment against Mendez in
Minnesota state court in the amount of $10,608,673, on Janu-
ary 11, 2005. Almost ten months later, on November 5, 2005,
apparently in reaction to a judgment debtor’s examination
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scheduled by Northwest in pursuit of its default judgment,
counsel for Mendez made a demand against Westchester for
a defense. Westchester offered to provide Mendez with coun-
sel to attempt to set aside the default judgment in favor of
Northwest, subject to a reservation of rights, but Mendez did
not respond to the offer.
A few days later, on December 1, 2005, Westchester filed
this diversity action in federal district court in Nevada seeking
a declaratory judgment that Mendez breached his duties under
the policy, that Mendez had forfeited the right to make a
claim under the policy, and that Westchester had no duty to
defend or indemnify Mendez. Mendez filed an answer on
December 30, 2005. Westchester filed an amended complaint
on June 14, 2006. Mendez did not answer the amended com-
plaint.
In the meantime, on March 3, 2006, Northwest moved to
intervene in the action filed by Westchester. The district court
granted Northwest’s motion to intervene on March 27, 2006.
As will be discussed below, Northwest did not file a pleading
in its own behalf in the lawsuit in the form of either an answer
to Westchester’s complaint or of any affirmative claim of its
own, despite the requirement for such a pleading in Rule
24(c) of the Federal Rules of Civil Procedure. It was permit-
ted by the district court to intervene, nonetheless.
Westchester made repeated attempts to depose Mendez, but
Mendez never attended the scheduled depositions. Sometime
later, Mendez’s attorneys filed a motion to withdraw as coun-
sel due to inability to communicate with their client and fail-
ure to receive payment, which the district court granted on
August 9, 2006.
Westchester then moved to strike the answer filed on behalf
of Mendez or to compel Mendez’s deposition. The court
granted the motion to compel and denied the motion to strike,
a magistrate judge holding that there was not at that point a
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clear record of delay and disobedient conduct warranting the
entry of a default judgment and that additional effort should
be made to secure Mendez’s participation.
Westchester hired a private investigator to attempt to serve
Mendez personally. The investigator confirmed Mendez’s
address and attempted to serve him at the address on multiple
occasions. The investigator also left notes at Mendez’s resi-
dence and with his three nearest neighbors. After the investi-
gator was unable to serve Mendez personally, Westchester
served Mendez with the Fourth Amended Notice of Deposi-
tion of Phil Mendez via certified mail, which was returned
marked “unclaimed.”
The deposition of Mendez did not occur. Westchester again
moved to strike the answer filed on behalf of Mendez and,
further, for entry of default judgment. The district court
granted the motion to strike and entered a default judgment
against Mendez under Rule 37(d) for the failure to respond to
discovery, in an order entered November 5, 2007.
In the order, the district court held that Northwest, as a
party to the suit, was bound by the default judgment entered
against Mendez. The court’s order explained that ruling:
The Court will not exempt Northwest from the
effects of a default judgment against Mendez
because no authority supports such an exemption.
No duty to intervene exists, and a decision not to
intervene does not expose a non-party to a proceed-
ing’s preclusive effects. Kourtis v. Cameron, 419
F.3d 989, 998 (9th Cir. 2005). But, if a party chooses
to intervene, a grant of intervention makes the inter-
venor a full party. Comm’rs Court of Medina
County, Tex. v. United States, 683 F.2d 435, 440-41
(D.C. Cir. 1982). And, a party is bound by a judg-
ment in litigation. Yniguez v. Arizona, 939 F.2d 727,
735 (9th Cir. 1991) (quoting Hansberry v. Lee, 311
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U.S. 32, 40 (1940)). A judgment “among parties to
a lawsuit resolves issues as among them . . . .” Mar-
tin v. Wilks, 490 U.S. 755, 762 (1989), superseded
by statute on other grounds. Joinder as a party sub-
jects parties to the Court’s jurisdiction and binds
them to a judgment. Westlake N. Prop. Owners
Ass’n v. City of Thousand Oaks, 9115 F.2d 1301,
1306 (9th Cir. 1990) (citing Martin, 490 U.S. at
762).
Northwest was not obligated to intervene. Now
that it has, however, the judgment binds it as a party.
Thus, this Court will not specifically exempt North-
west from the effects of a default judgment against
Mendez. . . . A default judgment against Mendez
may affect Northwest’s ability to recover for the
incident, but whether this judgment might preclude
Northwest from bringing separate litigation against
Westchester is a distinct issue not presently before
the Court.
In the same order, the district court denied several motions
by Northwest, including a motion for leave to file an answer,
a motion for summary judgment based on a theory that North-
west was an intended third-party beneficiary of the insurance
contract between Mendez and Westchester, a discovery
motion, and a motion for trial by jury. The order specifically
declared “that Westchester has no duty to defend or to indem-
nify Phil Mendez, doing business as Professional Aircraft
Line Service, for the underlying claim that is the subject of
the suit against Mendez in Minnesota.” The order entered
judgment in favor of Westchester and against “Defendants,”
apparently referring to both Mendez and Northwest.
Northwest filed a timely notice of appeal.
II. Discussion
Northwest’s principal argument on appeal is that Northwest
should not have been held bound by the entry of default and
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default judgment against Mendez, and that the district court
should have limited itself to entry of default, not default judg-
ment, against Mendez. Before we can reach that issue, how-
ever, we must deal with a threshold objection by Westchester
—that Northwest lacks standing to appeal because of its fail-
ure to file a pleading in the district court.
A. Northwest’s standing
Westchester argues that Northwest lacks standing to appeal
because it presents no case or controversy for this court to
decide. Westchester maintains that because Northwest did not
file an answer or a complaint and did not adopt any pleading
filed by another party, it has no interest to assert. Westches-
ter’s argument is both inconsistent with precedent and lacking
in logic.
[1] It is true that Federal Rule of Civil Procedure 24(c)
requires that a motion to intervene “must state the grounds for
intervention and be accompanied by a pleading that sets out
the claim or defense for which the intervention is sought.”
Fed. R. Civ. P. 24(c). Northwest did not present such a plead-
ing, nor did it seek leave to file a pleading until months after
Westchester moved to strike Mendez’s answer and just two
weeks before entry of the district court order that is the sub-
ject of this appeal.
[2] That does not mean that Northwest does not have an
interest in this case or standing to bring this appeal, however.
Northwest’s interest is obvious: it wants to be able to collect
its judgment against Mendez from the Westchester insurance
policy and it cannot do that if Westchester is not liable under
that policy. That interest was explicitly identified in North-
west’s motion to intervene, which asserted that it sought “to
protect its interest in the proceeds of the insurance policy as
satisfaction of [the default] judgment” it had obtained against
Mendez in Minnesota. That motion specifically stated that a
“default in the declaratory judgment action [against Mendez]
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would be fatal to Northwest’s interest in collecting the insur-
ance proceeds.” The district court recognized Northwest’s
interest, and it granted the motion to intervene.
[3] Westchester offers no substantive argument that North-
west does not have an actual interest. Indeed, it affirmatively
acknowledges that Northwest, as an allegedly injured third
party, has an independent right to litigate coverage. It simply
seeks to capitalize on Northwest’s failure to file a pleading as
called for by Rule 24(c). But Northwest’s interest did not dis-
appear because of that procedural misstep. We have made
clear that the failure to comply with the Rule 24(c) require-
ment for a pleading is a “purely technical” defect which does
not result in the “disregard of any substantial right.” Shores
v. Hendy Realization Co., 133 F.2d 738, 742 (9th Cir. 1943).
“Courts, including this one, have approved intervention
motions without a pleading where the court was otherwise
apprised of the grounds for the motion.” Beckman Indus., Inc.
v. International Ins. Co., 966 F.2d 470, 474 (9th Cir. 1992).
See 7C Charles Alan Wright, Arthur R. Miller & Mary Kay
Kane, Federal Practice and Procedure § 1914 (3d ed. 2009)
(“If the intervenor is content to stand on the pleading an exist-
ing party has filed, it is difficult to see what is accomplished
by adding to the papers in the case a new pleading that is
identical in its allegations with one that is already in the
file.”).
[4] The Supreme Court established some time ago that an
actual controversy can exist between an insurer and the alleg-
edly injured third party even though that third party is not a
party to the insurance contract. Maryland Cas. Co. v. Pacific
Coal & Oil Co., 312 U.S. 270, 273-74 (1941). Northwest has
standing to bring this appeal.
B. Entry of default judgment
Mendez has not appealed the district court’s order. North-
west does not defend Mendez’s failure to appear for deposi-
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tion or question whether there was sufficient basis for the
district court to take action against Mendez under Rule 37(d).
Northwest argues, however, that it is entitled to defend
against Westchester’s declaratory judgment action in its own
right and that the district court should not have entered a
default judgment in the action against all defendants based on
Mendez’s failure to appear for a deposition. We agree.
[5] As a general rule, default judgments are disfavored;
cases should be decided upon their merits whenever reason-
ably possible. See Pena v. Seguros La Comercial, S.A., 770
F.2d 811, 814 (9th Cir. 1985). It has long been established
that, where there are several defendants, the transgressions of
one defaulting party should not ordinarily lead to the entry of
a final judgment, let alone a judgment fatal to the interests of
other parties. As the Supreme Court stated more than a cen-
tury ago:
The true mode of proceeding where a bill makes
a joint charge against several defendants, and one of
them makes default, is simply to enter a default and
a formal decree pro confesso against him, and pro-
ceed with the cause upon the answers of the other
defendants. . . . But if the suit should be decided
against the complainant on the merits, the bill will be
dismissed as to all the defendants alike—the
defaulter as well as the others. If it be decided in the
complainant’s favor, he will then be entitled to a
final decree against all.
Frow v. De La Vega, 82 U.S. 552, 554 (1872).
[6] A default entered against an insured policyholder,
Mendez, should not prevent an injured third party, in this
instance Northwest, from proceeding on its own behalf. The
argument for permitting another party to proceed is especially
powerful in the context of third-party liability insurance,
where the insured may lose interest and the injured party has
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the primary motivation to pursue the claim. In so holding, we
join at least two other circuits.
In Hawkeye-Security Ins. Co. v. Schulte, 302 F.2d 174 (7th
Cir. 1962), an insurer sought a declaratory judgment that it
had no obligation to defend or indemnify its insured under an
automobile liability policy for claims arising out of an auto-
mobile collision. As in our action, the insured party was held
to be in default, in that case for failing to file an answer, and
the insurance company persuaded the district court to extend
the default to apply to the injured party, which had answered
the complaint. Id. at 175. The Seventh Circuit vacated the
judgment entered by the district court:
[The insurance company] argues that through the
default of [the insured drivers] the allegations of the
complaint are to be taken as true. This argument
assumes that they were the only parties entitled to
contest the allegations of the complaint. Since [the
injured person] was a proper party, the default of
[the insured] defendants may not preclude [the
injured person’s] right in this respect.
Id. at 177. The court further stated that the injured party
“being a proper party to an actual controversy with [the
insurer] should be heard to assert any proper defense raised by
his answer to the complaint.” Id.
In another case involving an automobile liability policy, the
Third Circuit similarly held that the default of the insured pol-
icyholder should not affect the injured third party’s ability to
defend against a declaratory action brought by the insurance
company:
Concluding that the injured party has an indepen-
dent, and not a derivative right, to be heard, is not
only jurisprudentially sound, but is also realistic:
“Certainly from a pragmatic viewpoint, it is quite
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true that in many of the liability insurance cases, the
most real dispute is between the injured third party
and the insurance company, not between the injured
and an oftentimes impecunious insured.”
Federal Kemper Ins. Co. v. Rauscher, 807 F.2d 345, 354 (3d
Cir. 1986) (quoting 6A J. Moore, Moore’s Federal Practice
¶ 57.19). The court went on to state that “[i]n terms of fair-
ness, the injured party should be able to present its case upon
the ultimate issues, even if the insured does not choose to par-
ticipate.” Id. at 355. The court reasoned that “it would be
anomalous to hold that the [injured party] should not be given
an opportunity to establish their case against [the insurer]
because of a default which they could not prevent,” and that
the injured party therefore “had standing and . . . [its] rights
are independent and not derivative of [the insured party].” Id.
[7] It would be similarly inappropriate in our case to extend
the default by Mendez to Northwest. Northwest was not
responsible for the failure of Mendez to appear for his deposi-
tion. Northwest was properly permitted to intervene in the
action. Default was not entered against Northwest, so there is
no valid basis to deny it the opportunity to try to defend
against Westchester’s claim for declaratory relief.
[8] Westchester argues that Northwest cannot prevail
against such a claim, because Mendez failed to give proper
notice of the claim to Westchester, as required under the pol-
icy. Perhaps that will turn out to be the conclusion. But that
was not the basis for the judgment entered here by the district
court. The district court held Mendez in default for failure to
appear for his deposition. The default and the subsequent
judgment did not result from a determination that Mendez’s
failure to notify the insurance company about a potential
claim relieves the insurer from liability. Northwest contends
that it will be able to overcome Mendez’s failure to notify
Westchester. We express no view on the factual and legal
arguments on that issue briefly described to us by Northwest.
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We hold only that Northwest should not be precluded by the
default of Mendez in the litigation from presenting those
arguments and having them adjudicated on the merits.
III. Conclusion
We vacate the default judgment and remand the case for
further proceedings.
VACATED and REMANDED.
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