November 23, 2010 – Monty Gallegos v. Nevada General Insurance Company, No. 29,280

1 printed pages contain little extracted OCR body text; searchable legal-body completeness has not been established for those pages.

OCR transcription for search; preserved printed pages are authoritative

IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

Opinion Number:

Filing Date: _November 23, 2010

NO. 29,280
MONTY GALLEGOS,
Plaintiff-Appellant,
V.
NEVADA GENERAL INSURANCE COMPANY,
Defendant/Cross-Claimant- Appellee.

APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY
Geraldine E. Rivera, District Judge

Law Offices of Geoffrey R. Romero
Geoffrey R. Romero

Albuquerque, NM

Garcia & Vargas, LLC

Ray M. Vargas, I
Santa Fe, NM

for Appellant

Rugge, Rosales & Associates, P.C.
Dale R. Rugge
James Douglas Green

Albuquerque, NM

for Appellee
OPINION

2
BUSTAMANTE, Judge.
{1} 	This case requires us to consider the extent to which an assertedly injured third-
party claimant may participate in a declaratory judgment action brought by an
automobile insurance company against its insured seeking to deny coverage under its
policy. 	We conclude that third-party claimants are necessary parties to such
declaratory judgment actions. The district court having ruled otherwise, we reverse.
I. 	BACKGROUND
{2} 	The historical facts out of which this case arises are simple. Monty Gallegos
(Plaintiff) and Michelle Lucero (Defendant) were involved in an automobile collision.
Defendant was driving a car insured by Appellee Nevada General Insurance Company
(Nevada General). 	Nevada General paid for damage to Plaintiff’s vehicle, but the
parties could not agree on medical expenses. 	Plaintiff sued for personal injury,
naming both Defendant and Nevada General.
{3} 	The procedural issues which ensued are more complex. After the suit was filed,
Defendant could not be found. Nevada General answered the complaint, but argued
that Plaintiff had failed to join a necessary party (presumably Defendant). Plaintiff
then requested leave to serve Defendant by publication; Nevada General opposed.
The district court authorized service by publication. 	Notice was published, and

3
Defendant did not respond. 	Although Nevada General argued against default, the
district court entered an order on December 4, 2007, awarding default judgment
against Defendant. The same order bifurcated the proceedings, separating the trial on
Defendant’s liability from the fight over who would pay the judgment (if any). 	The
issue of payment was “stayed until further order by the Court.” The trial on liability
proceeded to an evidentiary hearing on June 17, 2008, and on July 21, 2008, the court
entered judgment against Defendant for $20,564.55.
{4} 	On June 20, 2008, shortly after the evidentiary hearing but before judgment had
been entered, Nevada General filed a cross-claim for declaratory judgment. 	In it,
Nevada General argued that because Defendant could not be found, she had violated
the conditions of her policy requiring her to help prepare a defense. Because of this,
Nevada General argued that it had no duty to defend or indemnify Defendant. Plaintiff
was not made a party to the declaratory judgment action.
{5} 	Plaintiff filed an answer to the cross-claim on July 29, 2008, eight days after
default judgment had been entered against Defendant. In response, Nevada General
filed a motion to strike the entire answer, arguing that because Plaintiff was not a
party to the cross-claim, the filing was immaterial. Plaintiff countered that because
he had secured a judgment against Defendant, he had standing to assert the judgment
against Nevada General, and should therefore be permitted to answer the declaratory

4
action. The district court granted the motion to strike. Defendant never answered the
cross-claim, and Nevada General obtained a default judgment declaring that it was not
required to defend or indemnify Defendant.
II. 	DISCUSSION
{6} 	On appeal, Plaintiff contests both the order striking his answer to the cross-
claim and the order granting default judgment as to the cross-claim. The narrow issue
before us is whether the district court abused its discretion in striking Plaintiff’s
answer. More broadly, the issue is whether an injured third party may participate in
an action brought under the Declaratory Judgment Act (DJA), NMSA 1978, Sections
44-6-1 to -15 (1975), by an automobile insurer to deny coverage to its insured.
Because we hold that existing claimants must be joined in an insurer’s declaratory
action to deny coverage, it follows that the district court’s decision to strike Plaintiff’s
answer was error.
{7} 	Insurers commonly use declaratory judgments against their insureds to
determine the extent of coverage. 	Frequently such suits are filed as stand-alone
actions rather than cross-claims. See, e.g., Home Fire & Marine Ins. Co. v. Schultz,
80 N.M. 517, 518, 458 P.2d 592, 593 (1969). Sometimes injured third parties are not
even aware of the proceedings. See, e.g., In re Estate of Heintzelman v. Air Experts,
Inc., 126 Ohio St. 3d 138, 2010-Ohio-3264, 931 N.E.2d 548, at ¶ 5. Occasionally,

5
insurers have even gone so far as to advise the insured not to appear in the declaratory
actions. Id. We examine which parties are necessary in a declaratory action against
this background, discussing first the requirements of the DJA, and second the effect
of default declaratory judgments on parties who were not joined.
A. 	The Declaratory Judgment Act
{8} 	Plaintiff argues that the district court abused its discretion by striking his
response to Nevada General’s cross-claim against Defendant and granting a default
declaratory judgment that Nevada General was not required to defend or indemnify
its insured. 	We review the district court’s decision to grant a motion to strike for
abuse of discretion. See Gonzales v. Lopez, 2002-NMCA-086, ¶ 6, 132 N.M. 558, 52
P.3d 418. A trial court abuses its discretion when it exercises its discretion based on
a misunderstanding of the law. State v. Barr, 2009-NMSC-024, ¶ 29, 146 N.M. 301,
210 P.3d 198.
{9} 	The DJA provides a cause of action in cases of actual controversy to declare
rights, status, and other legal relations. See § 44-6-2. Declaratory judgment allows
a party “to settle and to afford relief from uncertainty and insecurity with respect to
rights, status and other legal relations.” Section 44-6-14. 	However, “[w]hen
declaratory relief is sought, all persons shall be made parties who have or claim any
interest which would be affected by the declaration, and no declaration shall prejudice

6
the rights of persons not parties to the proceeding.” Section 44-6-12. This means that
“any person or entity with an existing or potential interest in the outcome of the
action” must be named; failure to do so deprives the court of subject matter
jurisdiction. See 22A Am. Jur. 2d Declaratory Judgments § 208 (2003).
{10} 	The Supreme Court of New Mexico has addressed a factually similar case,
reversing a default declaratory judgment obtained by an insurer against its absent
insured. In Schultz, a driver brought a personal injury suit against an insured party
who had allegedly collided with her. 80 N.M. at 518, 458 P.2d at 593. The insured
gave a statement to his insurer, but then disappeared. Id. The insurer then initiated
a separate declaratory judgment action against both the driver and the insured seeking
a declaration that the defendant “had breached the cooperation clause of the policy in
failing to appear, assist and cooperate with the insurer in the defense of the action.”
Id. 	As the defendant was unavailable, the Court entered a default declaratory
judgment for the insurer. Id.
{11} 	The driver appealed, arguing that the insured, who had not been served with
process, was an indispensable party to the declaratory judgment action. 	Id. 	The
Supreme Court agreed. Under NMSA 1953, Section 21-1-1(19)(B) (1969) (now Rule
1-019(B) NMRA, identical in its essentials), an indispensable party was “one whose
interests will necessarily be affected by a judgment in a particular case.” Schultz, 80

7
N.M. at 518, 458 P.2d 593. 	The Court reasoned that victory by the insurer in the
declaratory action would deprive the insured of his right to be defended and would
expose him “to the consequences of a judgment in the personal injury action even
though the insurance company had contracted to indemnify him.” Id. at 519, 458 P.2d
at 594. 	The Court concluded that since the insured’s interests were necessarily
affected by the declaratory judgment action, he was an indispensable party, and
reversed with instructions to dismiss the declaratory action. Id.
{12} 	Although Plaintiff has not argued that he was an indispensable party to Nevada
General’s cross-claim, Schultz is nevertheless instructive. 	In both Schultz and the
instant case, the insurer sought declaratory judgment against its absent insured to
avoid liability. 	The insured’s interest in Schultz was, in part, whether the insurer
would pay any judgment against him. Here, Plaintiff’s interest is whether Nevada
General will pay the judgment he has already obtained against its insured. Like the
insured in 	Schultz, Plaintiff’s interests would “necessarily be affected” by a
declaration of non-coverage (assuming he was allowed to participate in the declaratory
action). 	Id. 	Accordingly, like the insured in 	Schultz, Plaintiff here was an
indispensable party under Rule 1-019. 	We conclude that this also makes him a
required party under the DJA, which states that “[w]hen declaratory relief is sought,
all persons shall be made parties” who have any interest which would be affected.

8
Section 44-6-12 (emphasis added).
{13} 	The policies underlying New Mexico’s Mandatory Financial Responsibility Act
(MFRA), NMSA 1978, Sections 66-6-201 to -239 (1978, as amended through 2003),
provide additional support to the argument that Plaintiff was a required party under
Section 44-6-12 of the DJA. 	The MFRA “has its own strong public policy and
judicial precedent that affords third-party claimants a special, if not unique, place in
our jurisprudence.” Hovet v. Allstate Ins. Co., 2004-NMSC-010, ¶ 24, 135 N.M. 397,
89 P.3d 69. Unlike indemnification insurance, which simply protects the owner of the
vehicle from loss, compulsory liability insurance “is intended to provide a benefit to
the general public.” 	Raskob v. Sanchez, 1998-NMSC-045, ¶ 6, 126 N.M. 394, 970
P.2d 580. Requiring insurers to join third-party claimants in declaratory actions is
consistent with the unique status conferred upon the driving public by Raskob and its
progeny.
{14} 	Additionally, our decision is consistent with the majority of state and federal
courts that have considered the issue. The DJA is construed “to effectuate its general
purpose to make uniform the law of those states which enact it.” Section 44-6-15.
The United States Supreme Court has held that an injured party cannot avoid being
made a party to an insurer’s declaratory action against the insured for non-coverage.
See Md. Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 274 (1941). 	The Ninth

9
Circuit recently held that “[a] default entered against an insured policyholder . . .
should not prevent an injured third party . . . from proceeding on its own behalf” in
a declaratory action by the insurer. 	Westchester Fire Ins. Co. v. Mendez, 585 F.3d
1183, 1189 (9th Cir. 2009). 	It noted that the third party’s interest is obvious: 	“it
wants to be able to collect its judgment . . . from the [insurer’s] insurance policy and
it cannot do that if [the insurer] is not liable under that policy.” Id. at 1188. The court
also noted that “[i]t 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 judgment fatal to the interests of other parties,” id. at 1189, and that the argument
for allowing a third 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
the primary motivation to pursue the claim.” Id.
{15} 	Most (if not all) courts to address the issue have found that injured third parties
are proper participants in declaratory actions brought by insurers to deny coverage.
See, e.g., Hawkeye-Sec. Ins. Co. v. Schulte, 302 F.2d 174, 177 (7th Cir. 1962) (holding
that an injured third party has a right to participate in insurer’s declaratory action);
Standard Accident Ins. Co. v. Meadows, 125 F.2d 422, 423-24 (5th Cir. 1942) (“It has
been repeatedly held in this circuit and elsewhere that whether an insurer is bound
[under] an automobile insurance policy by a judgment against its insured, presents a

10
controversy for declaratory judgment as between it, its insured and the plaintiff.”);
Allstate Ins. Co. v. Hayes, 499 N.W.2d 743, 748 (Mich. 1993) (“[An] injured party in
an insurer’s action for declaratory judgment is a proper party to that action.”).
{16} 	In 	addition, 	some courts 	have 	gone 	so 	far 	as 	to 	hold 	injured 	parties
indispensable. See Fed. Kemper Ins. Co. v. Rauscher, 807 F.2d 345, 354-55 (3d Cir.
1986) (noting that injured third parties were indispensable in declaratory actions by
insurers against insureds and holding that insured’s default did not prevent injured
third party from defending in the declaratory action); In re Estate of Heintzelman, 126
Ohio St. 3d 138, 2010-Ohio-3264, 931 N.E.2d 548, at ¶ 20 (“[A] plaintiff with a claim
against an insured would seem to be a necessary party in a declaratory judgment
action in which the insurer denies coverage.”).
{17} 	After deciding Kemper, the Third Circuit has reached different results in similar
cases. In Liberty Mutual Insurance Co. v. Treesdale, Inc., 419 F.3d 216, 219 (3d Cir.
2005), the court affirmed the district court’s ruling denying various injured third
parties leave to intervene in an insurer’s declaratory action against an asbestos
manufacturer. In deciding Treesdale, the court did not refer to Kemper. Instead, it
relied on Third Circuit cases holding that a mere economic interest is insufficient to
allow intervention. Id. at 221-25. Here, in the context of New Mexico’s compulsory
automobile insurance regime, we find the reasoning of Treesdale unpersuasive.

11
Furthermore, unlike the court in Treesdale, which ignored contrary law regarding
Pennsylvania’s Declaratory Judgment Act, we interpret our DJA to make it
harmonious with those of other states. Subsequently, at least one district court in the
Third Circuit has recognized the tension between Kemper and Treesdale. Nationwide
Mut. Ins. Co. v. Garman, 2010 WL 2038575 (M.D. Pa. May 19, 2010). Although it
ultimately chose to follow Treesdale, it did so with little meaningful analysis and does
not help us here. In any event, both of these cases framed the issue in terms of the
Federal Rules of Civil Procedure, an issue we do not confront today except by
analogy.
{18} 	We recognize that our Supreme Court’s opinion in Schultz did not explicitly
hold that a person such as Plaintiff was a required party to the declaratory action.
Today, consistent with both Schultz and the well-reasoned state and federal cases that
have addressed this issue, we hold that when an automobile insurer brings a
declaratory action to deny coverage, both the insured and the existing plaintiffs
against the insured are required parties. 	Accordingly, the district court abused its
discretion by not allowing Plaintiff to participate in the declaratory action.
B. 	The Doctrine of Law of the Case
{19} 	Our conclusion that Plaintiff should have been allowed to participate is
bolstered by the fact that a default judgment under these circumstances would not bind

12
him. The effect of a declaratory judgment to which Plaintiff was not joined can be
analyzed under the DJA or under the principles of preclusion. Under either of these
approaches, Plaintiff could litigate the issue again in his own claim against Nevada
General.
{20} 	Because the declaratory action here is in the same proceeding as the liability
case, we apply the doctrine of the law of the case rather than the doctrine of issue
preclusion. See Alba v. Hayden, 2010-NMCA-037, ¶¶ 6-7, 148 N.M. 465, 237 P.3d
767. The doctrine of law of the case relates to litigation of the same issue recurring
within the same suit. Id. ¶ 7. Its purpose is to ensure that once a particular issue in
a case is settled it remains settled. 	Id. ¶ 8. 	In Alba, the question was whether a
defendant was bound by summary judgment against a co-defendant. 	Id. ¶ 1. 	The
summary judgment was premised upon matters that had been deemed admitted
because the co-defendant had not responded to them. Id. ¶ 3. Because under existing
law one defendant could not be bound by the deemed admissions of a co-defendant,
this Court concluded that a defendant could not be bound by summary judgment
against a co-defendant premised upon deemed admissions. Id. ¶ 13.
{21} 	A similar result obtains here. The DJA forbids a party from being prejudiced
by a declaratory action to which he was not a party. Section 42-6-12. Following the
reasoning of Alba, we conclude that a default declaratory judgment against only

13
Defendant would not become the law of the case with respect to Plaintiff. It follows
that, were we to affirm the district court, Plaintiff would be free to litigate the
coverage issue again in the non-liability portion of his case. Such a result is contrary
to the purposes of both the doctrines of preclusion, see Alba, 2010-NMCA-037, ¶ 6
(“The principles of preclusion operate to . . . reliev[e] parties of the burdens of
multiple lawsuits . . . and prevent[] inconsistent decisions.” (internal quotation marks
and citation omitted)), and the DJA, see Hayes, 499 N.W.2d at 747 (“[T]he purpose
of the [DJA] is to allow parties to avoid multiple litigation. . . .”).
{22] 	Indeed, our Supreme Court in Schultz took it for granted that non-parties would
not be bound by declaratory judgments. See 80 N.M. at 518-19, 458 P.2d at 593-94.
Similarly, the Court in Maryland Casualty Company, recognizing that declaratory
judgment against only the insured would not bind the injured party, required joinder
of the injured third-party to avoid the possibility that “opposite interpretations of the
[insurance] policy might be announced” in the declaratory action and the liability
action. 312 U.S. at 274; see also, e.g., Hayes, 499 N.W.2d at 743, 751 (holding that
a default declaration of non-coverage against insured does not bind third parties); El
Naggar Fine Arts Furniture, Inc. v. Indian Harbor Ins. Co., 248 S.W.3d 202, 207
(Tex. App. 2007) (“[A]n injured third party . . . should not be bound by a declaration
obtained by an insurer against a defaulting insured in an action in which the injured

14
third party is not named.”).
{23} 	Requiring insurers to join injured parties in declaratory judgment actions
comports with the policies behind both the DJA and the principles of preclusion.
This, together with our conclusion that plaintiffs as well as insureds are required
parties in declaratory actions to deny coverage by insurers, convinces us that the
district court erred in denying Plaintiff an opportunity to contest the coverage issue
below.
III. 	CONCLUSION
{24} 	For the foregoing reasons, we reverse the order granting the motion to strike
Plaintiff’s answer to cross-claim and remand to the district court with instructions to
vacate the default judgment in the declaratory action.
{25} 	IT IS SO ORDERED.
MICHAEL D. BUSTAMANTE, Judge

WE CONCUR:

RODERICK T. KENNEDY, J udge

MICHAEL E. VIGIL, Judge

15