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PODOLSKY v. DEVINNEY

February 26, 1968

Betty PODOLSKY, Plaintiff,
v.
Ethel M. DEVINNEY and Garry A. Devinney, Defendants


Croake, District Judge.


The opinion of the court was delivered by: CROAKE

CROAKE, District Judge.

The present motion, seeking vacation of an order of attachment, challenges the constitutionality of the recent decision by the New York Court of Appeals in Seider v. Roth, 17 N.Y.2d 111, 269 N.Y.S.2d 99, 216 N.E.2d 312 (1966). *fn1" In that case the Court of Appeals decided that an automobile liability insurance policy held with an insurance company doing business in New York becomes an attachable debt within the meaning of §§ 5201 and 6202 N.Y.C.P.L.R. *fn2" upon the occurrence of an automobile accident. *fn3" The defendants, through attorneys secured by their insurer, General Accident Fire & Life Assurance Corporation, Ltd. (GENERAL ACCIDENT) *fn4" charge that New York lacks the requisite minimum contacts necessary to subject the insurance policy to levy and therefore assertion of jurisdiction by New York State violates the due process clause of the 14th amendment of the United States Constitution. The motion papers on behalf of the insurer as garnishee also contend that because a limited appearance is not permitted under the New York law the named defendants, by failing to authorize an appearance of the insurance company on their behalf, may subject the insurer to a default judgment up to the policy limits without ever allowing the company to defend the action on its merits. *fn5" GENERAL ACCIDENT argues that such a result would deprive it of its property without due process of law. Implicit in both of these objections to jurisdiction is the contention that New York in effect has established a direct action without sufficient minimum contacts or without adequate procedural safeguards.

 The present controversy is a product of an accident occurring on or about May 8, 1966. The plaintiff, a New York resident, alleges in her complaint that while crossing Saddle River Road at the intersection with Rys Place in Fairlawn, New Jersey, she was struck by an automobile owned by Ethel M. Devinney and being operated at the time by her son, Garry A. Devinney. The Devinneys are residents of New Jersey. As a result of the accident plaintiff Podolsky suffered serious injuries requiring hospitalization in Fairlawn Memorial Hospital in Fairlawn, New Jersey, from the date of the accident through June 10th of that year. Damages sought in the complaint total $75,000.

 On July 21, 1967, the present action was commenced against the petitioners in the Supreme Court of the State of New York in Bronx County by personal service of a summons and complaint. Theretofore, on July 14, 1967, an order of attachment had issued from the above court directing the Sheriff to levy on the property of the defendants. Pursuant to this order the Sheriff attached Ethel M. Devinney's interest in automobile liability policy No. ACF 97-813-32 by delivering a copy of the order to GENERAL ACCIDENT at its offices at 110 William Street in New York City. As this action could have been brought here in the first instance under 28 U.S.C. § 1332 (1964), the defendants chose to remove to this court under 28 U.S.C. § 1441 (1964). *fn6" The removal was accomplished on August 17 and papers noticing this motion were promptly filed with the clerk of the court on September 12, 1967.

 At the outset it should be noted that in a case where jurisdiction is based on diversity of citizenship this court normally is bound to follow the decisions of the court of last resort in New York. Guaranty Trust Co. v. York, 326 U.S. 99, 65 S. Ct. 1464, 89 L. Ed. 2079 (1945); Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938). The District Court must apply the law enunciated by the highest state court even if it believes a given case was wrongly decided. Universal Underwriters Ins. Co. v. Wagner, 367 F.2d 866 (8th Cir. 1966); Klages v. Cohen, 146 F.2d 641 (2d Cir. 1945); Paschall v. Mooney, 110 F. Supp. 749 (S.D.N.Y.1953). However, even in diversity cases, when the decision of the state court is challenged on constitutional grounds, this court must be guided by the decisions of the Supreme Court and appellate courts of the United States rather than the state courts. See Gilmore v. Greene County Democratic Party Executive Committee, 370 F.2d 919, 920 (5th Cir. 1966); Aftanase v. Economy Baler Co., 343 F.2d 187 (8th Cir. 1965); Ark-La Feed & Fertilizer Co. v. Marco Chemical Co., 292 F.2d 197 (8th Cir. 1961); Belanger v. Great American Indemnity Co. of New York, 89 F. Supp. 736, 738 (D.C.La.1950). Therefore, while the rationale of the New York Court of Appeals in Seider v. Roth, supra, deserves our careful consideration, this court is not necessarily bound by that determination. See, e.g., Smayda v. United States, 352 F.2d 251 (9th Cir. 1965), cert. denied, 382 U.S. 981, 86 S. Ct. 555, 15 L. Ed. 2d 471 (1966).

 The serious constitutional questions presented in this case have been the subject of several prior determinations in both federal and state courts in New York. In Nationwide Mutual Ins. Co. v. Vaage, 265 F. Supp. 556 (S.D.N.Y.1967), a three judge court was convened to consider the constitutionality of the attachment procedure approved in Seider v. Roth. While the three judge court dissolved itself on the ground that under 28 U.S.C. § 2283 (1964), it lacked the power to enjoin the pending state court actions, Judge Tyler writing for the panel also observed that the insurance companies had "* * * yet to fully and fairly present their constitutional arguments to the New York courts at any level." Id. at 562. Under these circumstances the court believed that the companies had not shown the existing state actions could not be prosecuted with full protection of the petitioners' constitutional contentions. See England v. Louisiana State Board of Medical Examiners, 375 U.S. 411, 420, 84 S. Ct. 461, 11 L. Ed. 2d 440 (1964); Government & Civic Employees Organizing Committee CIO v. Windsor, 353 U.S. 364, 77 S. Ct. 838, 1 L. Ed. 2d 894 (1957); Railroad Commission of Texas v. Pullman Co., 312 U.S. 496, 501, 61 S. Ct. 643, 85 L. Ed. 971 (1941).

 Any reasons for abstention by the federal courts, however, have now been removed, for the New York Court of Appeals has upheld the constitutionality of Seider in Simpson v. Loehmann, 21 N.Y.2d 305, 287 N.Y.S.2d 633, 234 N.E.2d 669 (December 29, 1967). In Simpson an infant plaintiff was injured when cut by the propeller of a boat owned by a Connecticut resident in the waters off Madison, Connecticut. Being unable to obtain in personam jurisdiction over the defendant in New York, (see § 302 N.Y.C.P.L.R.), an action was commenced by personal service on the defendant in Connecticut and attachment of an insurance policy issued to the defendant by an insurance company doing business in New York. The defendant moved to vacate the attachment on jurisdictional and constitutional grounds. The Court of Appeals upheld the attachment procedure in a sharply divided opinion. *fn7" The opinion of the court was written by Chief Judge Fuld and followed what may be characterized as the traditional approach to the question of jurisdiction. The opinion in simplest terms stated that the insurance policy could fairly be characterized as a debt. The requisites necessary for in rem or quasi in rem jurisdiction are the presence of the res within the state, effective seizure, and adequate notice to its owner. *fn8" Judge Fuld found these requisites present in Simpson for there was personal service upon the owner of the debt and under the rule in Harris v. Balk, 198 U.S. 215, 227, 25 S. Ct. 625, 49 L. Ed. 1023 (1905), the situs of a debt follows the debtor and is subject to garnishment wherever the debtor may be found. As the insurance company was doing business in New York the situs of the debt was New York. *fn9"

 Judge Keating concurring in the opinion of the court expanded upon the theme, also expressed by Judge Fuld, that the procedure sanctioned in Seider v. Roth can be sustained on the ground that the State of New York has a sufficient governmental interest in accidents involving New York plaintiffs to legislate a direct action statute. In Judge Keating's view the procedure in Seider v. Roth accomplishes this result by compelling the insurer, the real party defendant, to defend in this state provided it transacts business here and is thus subject to the jurisdiction of the New York courts. See Simpson v. Loehmann, 21 N.Y.2d at 314, 287 N.Y.S.2d at 640, 234 N.E.2d at 674 (December 29, 1967).

 Both of these views must be carefully considered with the caveat that this court should not decide that the New York attachment procedure used in the present case is unconstitutional unless such an adjudication is unavoidable. See United States v. Chibbaro, 361 F.2d 365 (3rd Cir. 1966); Kelly v. Illinois Bell Tel. Co., 325 F.2d 148 (7th Cir. 1963). *fn10"

 The concept of quasi in rem jurisdiction is based on the physical power of the state with regard to the res or thing attached. See McDonald v. Mabee, 243 U.S. 90, 91, 37 S. Ct. 343, 61 L. Ed. 608 (1917); Pennoyer v. Neff, 95 U.S. 714, 24 L. Ed. 565 (1878). As such it must be recognized that the authority of any tribunal is necessarily restricted by the territorial limits of the State in which it is functioning. See, e.g., Hanson v. Denckla, 357 U.S. 235, 246, 78 S. Ct. 1228, 2 L. Ed. 2d 1283 (1958). While tangible property rarely poses any difficulty in determining the situs of the res, the location and character of intangible assets is often a troublesome problem. *fn11" In Harris v. Balk, supra, the United States Supreme Court held that a simple debt "* * * clings to and accompanies * * * [the debtor] * * * wherever he goes. * * * It is not a question of possession in the foreign state for possession cannot be taken of a debt * * * as tangible property might be taken possession of." Id., 198 U.S. at 222-223, 25 S. Ct. at 626-627. In the decision of that case emphasis was placed on the fact that because a simple debt was involved, "* * * Balk could have sued Harris in Maryland to recover his debt, notwithstanding the temporary character of Harris' stay there." Id. at 224, 25 S. Ct. at 627.

 More than sixty years have passed since the decision in Harris v. Balk and the question before this court is whether within the confines of due process an insurance policy may be viewed as a simple debt subject to attachment wherever the debtor (the insurance company) may be found. As the New York Court of Appeals saw the problem in Seider :

 
"The whole question, therefore, is whether [the insurer's] contractual obligation to defendant is a debt or cause of action such as may be attached. The * * * policy is in customary form. It requires [the insurer] among other things, to defend [the insured] in any automobile negligence action and, if judgment be rendered against [the insured], to indemnify him therefor. Thus as soon as the accident occurred there was imposed on [the insurer] a contractual obligation which should be considered a 'debt' within the meaning of CPLR 5201 and 6202." Seider v. Roth, supra, 17 N.Y.2d at 113, 269 N.Y.S.2d at 101, 216 N.E.2d at 314.

 Automobile liability insurance policies have evolved through the years into documents representing relatively complex collections of rights and obligations involving the liability carriers, their insureds, claimants, the general public, and the state in which the policy was issued. Although the duty to defend is unquestionably a benefit accruing to an insured by reason of a liability insurance contract, this duty cannot arise until jurisdiction is obtained over the insured. *fn12" Nor can the obligation to indemnify arise until a judgment has been entered against the insured. Further, when viewed in context, the obligation to defend is an important right of the insurer, essential in protecting its financial interest in the outcome of the litigation.

 In addition to the complexity of the obligation to defend, numerous other factors in an insurance contract, such as continuing duties of the insured to his insurance company and the enumerated exclusions present in the policy, militate against characterization as a simple debt. *fn13" But the fact that there are problems in characterizing an insurance policy as a simple debt does not necessarily import a denial of due process. In the absence of harm to the defendants, they would have no standing to complain. In addition, because the ...


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