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NAP, INC. v. SHUTTLETEX

September 11, 2000

NAP, INC., PLAINTIFF,
V.
SHUTTLETEX, INC., AND THE ST. PAUL COMPANIES, INC. AS SUCCESSOR-IN-INTEREST TO USF & G CORP., DEFENDANTS.



The opinion of the court was delivered by: Marrero, District Judge.

DECISION AND ORDER

Plaintiff NAP, Inc. ("NAP"), a New York corporation which manufactures women's clothing for sale under the Crabtree & Evelyn label, brought this diversity action naming as defendants Shuttletex, Inc. ("Shuttletex"), a New Jersey company which is currently in bankruptcy proceedings, and Shuttletex's commercial general liability insurer, U.S. Fidelity and Guaranty Insurance Underwriters, Inc. (hereinafter, "USF & G"), whose successor in interest is the St. Paul Companies, Inc. NAP seeks damages from Shuttletex for breach of an express and implied warranty, alleging that in 1997 NAP purchased lace from Shuttletex that was warranted as, but in fact was not, appropriate for machine-washable clothing. NAP also asks the Court for a determination, pursuant to the federal Declaratory Judgment Act, 28 U.S.C. § 2201, that USF & G must pay any damages that in the underlying action Shuttletex is found to have caused NAP. USF & G, through the St. Paul Companies, has moved to dismiss NAP's declaratory relief action on the ground that, under New York law, NAP has no standing to sue the insurer prior to an entry of judgment against the insured. It is this motion that is currently before the Court.

Sometimes narrow disputes conceal deeper legal currents than the parties' definition and treatment of the issues would suggest. What is characterized as straightforward and mundane, at bottom, may be no small matter. For, like undertows, hidden forces may escape surface view but actually course beneath unseen toward a larger disposition. The full proportions of the potential legal outfall are not always immediately discerned. This action presents a case in point.

The parties concede that no factual issues divide them, and posit that the question they bring to the Court on this motion is a narrow one: whether resolution of their underlying difference is to be governed by federal procedure or state law; whether the state law in question is procedural or substantive. In addressing their arguments to the issues so framed, the parties' briefs are indeed very brief. Further, as regards the limited federal question presented, there is a substantial split among federal courts in this district that the Second Circuit has yet to address. And with respect to the state statute involved, on the books since 1917, the New York Court of Appeals has not ruled definitively, and the Appellate Division is also sharply divided, three Departments having expressed two diametrically opposed interpretations as to the proper application of the same provision.

Thus, surface dichotomies often tempt litigants into facile analysis, and invite courts to summary resolution of issues truly guided by larger undercurrents. What comes into play here is that choosing the proper measure to apply in adjusting the balance of procedure versus substance and the federal-versus-state-law jurisdictional equation, demands delicate calibrations. The decision calls for much more meticulous weighing of constitutional values and subtle accommodations of divergent interests implicated in the equitable administration of justice than a cursory look at the narrow private issue here would indicate.

DISCUSSION

USF & G argues that NAP, which was not a party to the underlying insurance contract at issue, has no privity with the insurer and thus has no standing to bring this claim against USF & G. While acknowledging that the New York Insurance Law allows non-parties injured by an insured to sue an insurer, USF & G asserts that the circumstances for such actions are strictly circumscribed by the controlling statute, New York Insurance Law § 3420. Section 3420(a)(2) of the statute requires that insurance policies issued or delivered in the state contain provisions specifically authorizing direct actions brought under the terms of the policy against an insurer by an allegedly injured party to be instituted only when a judgment against the insured person has remained unsatisfied for 30 days from the date of service of notice of entry of judgment.*fn1 N.Y. Insur. Law § 3420(a)(2) (McKinney 1985). Section 3420(b)(1) further provides that an action may be maintained against the insurer by a person who has obtained a judgment against the insured for damages or injury sustained during the life of the policy. See id.

USF & G argues that the requirement of entry of a judgment against the insured is a substantive state rule of law enunciating a condition precedent to the filing of any direct claim by an injured third party against an insurer, regardless of whether the remedy sought is declaratory or for damages. USF & G points to some state court cases that support its general position. See, e.g., Abdalla v. Yehia, 246 A.D.2d 373, 667 N.Y.S.2d 736 (1st Dep't 1998); Clarendon Place Corp. v. Landmark Insurance Co., 182 A.D.2d 6, 587 N.Y.S.2d 311 (1st Dep't 1992); Hershberger v. Schwartz, 198 A.D.2d 859, 604 N.Y.S.2d 428 (4th Dep't 1993).

NAP counters that the Federal Declaratory Judgment Act, 28 U.S.C. § 2201, through which it seeks relief against USF & G in this Court, is procedural and, thus, the remedy it authorizes is available here in accordance with federal law rather than state law, making interpretation of State Insurance Law § 3420 essentially immaterial to the appropriateness of a declaratory judgment. NAP points to some federal cases in this district supporting this proposition. See Gravatt v. General Star Indem. Co., No. 98 Civ. 6670, 1999 WL 212681 (S.D.N.Y. Apr.13, 1999); deBruyne v. Clay, No. 94 Civ. 4707, 1997 WL 471039 (S.D.N Y Aug.18, 1997); Ryder Truck Rental, Inc. v. Allcity Ins. Co., No. 94 Civ. 0712, 1995 WL 628968 (S.D.N.Y. Oct.26, 1995). In these cases, brought under diversity jurisdiction, the courts have rejected arguments that § 3420(b) precluded the application of the federal Declaratory Judgment Act. Relying on these precedents, NAP argues that there would be no conflict of laws principles foreclosing the application of federal procedure here.

Alternatively, NAP asserts that even if its claim were not brought under the federal declaratory judgment statute, the New York Insurance Law prohibits only a direct cause of action against the insurer to recover money damages and not a declaratory judgment action by the injured party in the underlying tort. As authority for this contention, NAP cites Watson v. Aetna Casualty & Surety Co., 246 A.D.2d 57, 675 N.Y.S.2d 367 (2d Dep't 1998) and related Second Department precedent. See, e.g., Halali v. Evanston Ins. Co., 245 A.D.2d 422, 666 N.Y.S.2d 676 (2d Dep't 1997); Tepedino v. Zurich-American Ins. Group, 220 A.D.2d 579, 580, 632 N.Y.S.2d 604, 605 (2d Dep't 1995). In these cases, the Appellate Division specifically held that a declaratory judgment action by an injured third party against an insurer is not barred by § 3420, even though direct actions for damages against the insurer are precluded prior to the entry of a judgment against the insured.

Thus, two threshold matters here emerge as critical to this Court's analysis of the issues presented. First is the application of the federal Declaratory Judgment Act and second the application of New York Insurance Law § 3420.

A. The Declaratory Judgment Act (the "Act")

NAP argues that it brought this action under federal law, affirmatively invoking 28 U.S.C. § 2201, and that the statute therefore governs the resolution of NAP's claim. It stresses the Act is procedural in that it offers only a remedy which does not demarcate substantive rights but procedurally merely limits the timing or control of when an action might otherwise be commenced.

This Court disagrees. NAP's arguments are not consistent with the language and legislative intent of the state law. They are also contrary to the proper application of the Act and to overarching policy ends of promoting ...


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