parties" were the air carriers, whose citizenship would be controlling for purposes of determining diversity of citizenship. Id.
A similar analysis appears in the Southern District's decision in Humm v. Lombard World Trade Inc., 916 F. Supp. 291 (S.D.N.Y. 1996). In Humm, the plaintiff was a lead underwriter for a Lloyd's syndicate of inactive underwriters referred to as "Names." Humm brought the action on behalf of himself and other policy underwriters to recover money loaned to the defendant insured. The court first explored the structure of Lloyd's of London, in which each Name subscribes to a small fraction of the insurance risk and the active underwriter, who must also be a Name, is appointed to manage the affairs, subscribe to policies and to settle and defend any insurance actions. The court found that the actual Names in the Lloyd's syndicates, rather than the active or leading underwriter, were the "real parties in interest," and thus, citizenship of the Names had to be examined in determining whether there was complete diversity between the plaintiffs and the defendants for purposes of diversity jurisdiction.
In reaching its holding, the court in Humm first looked to New York agency law, which provides that if the party making a contract with an agent is on notice that the agent is acting for a principal, then the principal is "partially disclosed" and the agent is not liable. Humm, 916 F. Supp. at 295 (citations omitted). Under agency principles, therefore, the court looked to the parties that would ultimately bear the financial risk of the loss, which were the inactive syndicate underwriters who actually provided the insurance coverage. Id. at 297-298. The court also noted that these insurance syndicates bore no resemblance to the business trusts addressed in Navarro because unlike trust beneficiaries, the inactive underwriters are investors who face the liability for the shares of the syndicates. Id. at 298. Each inactive underwriter was responsible for its proportional share of the specific insurance in question and thus, Navarro is inapplicable. Id. The court also noted that this result is consistent with the Supreme Court's decision in C.T. Carden v. Arkoma Associates, 494 U.S. 185, 110 S. Ct. 1015, 108 L. Ed. 2d 157 (1990), in which the Supreme Court rejected a real party in interest approach which looks to control over the conduct of the business and the ability to initiate or control the course of litigation.
The Court finds that the Second Circuit's decision in ARC and the court's analysis in Humm support the conclusion that it is the underlying insurance carriers, and not West Coast Marine, that are the real parties to this controversy. First, it is undisputed that the ultimate financial risk of loss from the Tobar action was borne by the underlying insurance companies and not West Coast Marine and that any award in this action would be remitted to the insurance companies. Second, it is also undisputed that West Coast Marine's role in this bad faith action is that of an attorney-in-fact and managing agent for those insurers. Moreover, as ARC makes clear, simply because the managing agent has the power to settle and defend lawsuits on behalf of the principals, to manage the affairs and income and expenditures and to execute contracts and policies on behalf of the principal does not mean that the agent has a real and substantial interest in the outcome of the litigation.
In reaching this conclusion, the Court rejects the plaintiffs' argument that West Coast Marine has a real and substantial interest in this litigation because part of its compensation is derived from the profitability of the insurers. In this regard, the plaintiffs also argue that Fremont Indemnity, West Coast Marine's reinsurer is also a real party to the controversy because Fremont had to pay claims to West Coast Marine as a result of the Tobar settlement. Fremont is also a California corporation that would destroy diversity of citizenship.
If plaintiffs' argument was accepted, however, virtually every individual who has a stake in the profitability of the underlying insurance companies would have standing to institute a bad faith action against the primary carriers. Such derivative injury on the part of West Coast Marine, which is not even a claim in this lawsuit, would extend the meaning of "real and substantial interest" beyond logical and manageable bounds. West Coast Marine's ability to participate in this action is based solely on its position as the managing agent for the insurance companies it represents, and is empowered to do so exclusively through the mechanism of the management agreement. According to the Second Circuit, in these circumstances, its citizenship may be disregarded and the focus of the inquiry into diversity must remain on the actual parties that have a direct stake in the outcome of this lawsuit.
The Court holds, therefore, that the real parties to this controversy are the named insurance companies in defendants' notice of removal and that West Coast Marine is a nominal or formal party whose citizenship can be disregarded for purposes of determining diversity of citizenship. In addition, as each of these insurance companies, along with the other named plaintiff carriers are diverse from the defendants, subject matter jurisdiction based on diversity of citizenship exists in this action and the case need not be remanded to state court.
C. Judicial Estoppel
Defendants also argue that West Coast Marine should not be able to change its legal position from its stance in Marine Terminals Corp. v. St. Paul Fire & Marine Insur. Co., 1990 U.S. Dist. LEXIS 7856, No. 89-4557, 1990 WL 174478, at *1 (N.D. Cal. April 25, 1990), in which West Coast Marine argued that its citizenship should be ignored as nominal in favor of the real parties to the controversy, which were the insurance companies it managed.
In Marine Terminals, creditors of an insured corporation sued St. Paul Fire and West Coast Marine in California state court for a declaratory judgment that the policy executed by St. Paul and West Coast Marine covered certain business debts incurred by the insured. West Coast Marine and St. Paul then removed the action to federal court on the basis of federal question and diversity of citizenship. The creditors then moved to remand the action to state court.
The court explored West Coast Marine's management agreement with the group of insurers it managed, identical to those in the instant action. The management agreement, also identical to the one in the current action, provided that West Coast Marine could accept and bind proposals for insurance policies and underwrite such business and issue policies. As manager, West Coast Marine was also to establish a bank account as a fiduciary into which all premiums would be deposited and from which all drafts in payments of losses and expenses and the managers' compensations would be drawn. The management agreement also provided that West Coast Marine could cancel or terminate, revise or endorse such policies and that the manager had the authority and responsibility to handle claims and losses. All losses and expenses, however, were to be ultimately paid by the insurance companies. As in this action as well, West Coast Marine was compensated through a percentage of gross earned premiums and contingent commissions.
In seeking remand, the creditors in Marine Terminals argued that West Coast Marine was a necessary party because it participated in the profits and losses of the companies it represented and was a party to the insurance contract. The court then analyzed whether joinder of West Coast Marine was fraudulent or a sham and concluded that it was not. 1990 WL 174478, at *3. Fraudulent joinder exists if the plaintiff fails to state a cause of action against a resident defendant, and the failure is obvious according to the settled rules of the state. Id. The court then analyzed whether under California law, a pool manager was considered an insurer and would be subject to suit for declaratory judgment. The question in fraudulent joinder, however, is whether plaintiffs can possibly state any claim under state law against the named defendant. Id. The creditors then claimed that for purposes of their declaratory judgment action to determine coverage, they had to sue West Coast Marine because it could affect the terms of the policy, could pay or reject claims, derives its compensation from the underwriting profits and has the power to defend the action. The court concluded that the joinder of West Coast Marine was not unreasonable given the breadth of its responsibilities under the management contract and thus there was no fraudulent joinder as a party defendant. Id. at *4. The court also noted that it would reach the same result under a real party in interest analysis because the insurance companies represented by West Coast Marine were not diverse from the plaintiff creditors. Id. at *5.
Although not phrased as such, defendants are arguing that West Coast Marine should be judicially estopped from taking a legal position contrary to a position taken in a prior action. Under this doctrine, an opposing party may prevent a party who benefits from the assertion of a certain position from subsequently adopting a contrary position. Young v. United States Department of Justice, 882 F.2d 633, 639 (2d Cir. 1989). The doctrine of judicial estoppel, however, only applies if the party against whom estoppel is sought actually obtained a judgment as a result of the inconsistent opinion. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109, 114 (2d Cir. 1990) (citation omitted). As West Coast Marine lost this argument in Marine Terminals, it could hardly have benefitted from the legal position in the prior determination. Accordingly, judicial estoppel does not apply.
Nevertheless, the court concludes that the California district court's decision in Marine Terminals is inapposite to the case at bar. First, that case involved the fraudulent joinder of a party, which necessitated an examination of whether the plaintiff/creditors could assert any cause of action against West Coast Marine as the managing agent for the insurance companies. In this action, however, the court is not faced with the issue of fraudulent joinder and focuses solely on the question of whether in this action for the recovery of the cost of settling the Tobar action, West Coast Marine has a real and substantial interest in the outcome. Second, Marine Terminals was a case seeking declaratory judgment that directly implicated West Coast Marine's position as manager and subscriber to the policy at issue. This case, on the other hand, has nothing to do with West Coast Marine's role as the manager for the seven underlying insurers, but rather seeks damages, that if awarded, would have to be remitted to the underlying insurance companies. Accordingly, the Mutual Marine decision has no bearing on the outcome of this motion.
D. Imposition of Sanctions on Plaintiffs' Counsel
Finally, the defendants have moved for sanctions against plaintiffs' counsel pursuant to Rule 11(c) of the Federal Rules of Civil Procedure and seek an award of reasonable expenses and attorney's fees incurred in opposing the plaintiffs' motion for remand. By letter dated May 30, 1997, defense counsel advised plaintiffs' counsel that if the motion was not withdrawn, they would make this motion for sanctions. Robert Giuffra, plaintiffs' counsel, responded by letter dated June 3, 1997 that he would not withdraw the motion and in addition, would seek an award of its legal fees and expenses upon successful remand of this action.
The Court has considered defense counsel's request and finds that sanctions are warranted under the circumstances of this action. Under Rule 11(b), an attorney who signs or submits a pleading or written motion certifies to the Court that the motion is not intended to cause a needless increase in the cost of litigation. In the present case, the information necessary to bring this motion to remand has been in plaintiffs' possession since the inception of this lawsuit in 1993, yet counsel waited until the conclusion of the jury trial to bring this argument to the Court's attention. Counsel's wait-and-see approach to proper motion practice in federal court defies reason and professionalism. In an artful attempt to get yet another bite at the apple after losing in federal court, plaintiffs' counsel allowed an uncompensable amount of judicial resources, including valuable time of citizens sitting for two weeks as jurors, to go forward before bringing a motion that rightfully should have been brought, if at all, years ago. For this reason, plaintiffs' counsel is hereby sanctioned in the amount equal to the amount of defendant's attorneys' fees and costs in responding to this motion. As such, defendants are directed to submit affidavits of fees and expenses incurred in opposing this motion.
In accordance with the opinion above, plaintiffs' motion to vacate the judgment of May 9, 1997 and to remand this action to state court is DENIED in its entirety. In addition, plaintiffs' counsel is sanctioned in an amount equal to defendants' attorneys' fees and costs in responding to plaintiffs' motion, which will be determined upon submissions of affidavits from defendants' counsel.
Joanna Seybert, U.S.D.J.
Dated: Uniondale, New York
August 25, 1997