Allenstown v. National Casualty CV-90-501-B 07/16/93

UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF NEW HAMPSHIRE

Town of Allenstown, et al.

v. Civil No. 90-501-B

National Casualty Company

O R D E R

The plaintiffs in this declaratory judgment action are

seeking a determination that their insurer is obligated to defend

and indemnify them in an underlying action that was also brought

in federal court.

One of the paramount guestions in this case is, who bears

the burden of proof with respect to the insurer's claim that the

plaintiffs have no coverage because they failed to notify the

insurer of the commencement of the underlying action? The answer

to this guestion depends upon the resolution of two subsidiary

issues: First, may a policyholder maintain a declaratory

judgment claim pursuant to RSA 491:22 in federal court and obtain

the benefits of the burden shifting provisions of RSA 491:22-a if

the underlying action is also pending in federal court? Second, if a litigant in federal court may not bring a claim under RSA

491:22 under these circumstances, what law will determine the

burden of proof to be applied in resolving plaintiffs'

declaratory judgment claim?

For the reasons that follow, the court determines that (1) a

litigant may not maintain a claim in federal court pursuant to

RSA 491:22 if the underlying action is also pending in federal

court; and (11) even though the burden of proof in this diversity

case is governed by New Hampshire law, the plaintiffs may not

invoke the burden shifting provisions of RSA 491:22-a because,

irrespective of where the insurance coverage claim was brought,

RSA 491:22 et sea, does not apply if the underlying action was

brought in the federal court. Accordingly, the court will look

to the language applied in New Hampshire contract actions and

will place the burden of proof on the plaintiffs to establish

that their insurer has breached the terms of the insurance

contract.

_______________________________ FACTS

On May 4, 1986, Paul Cutting was arrested by Officer

Montplaisir of the Allenstown Police Department. In April 1988,

Cutting and his wife sent a demand letter to the Allenstown Board

2 of Selectmen notifying the Board that they were making a claim

for damages against the Town, the Police Department, and Officer

Montplaisir (collectively "plaintiffs") for civil rights

violations that allegedly occurred during Cutting's arrest.

Plaintiffs sent the Cuttings' demand letter to their

insurer. National Casualty Company. The insurer opened a file

and obtained certain information from the plaintiffs concerning

the demand. The insurer claims that it instructed the plaintiffs

to notify it by telephone if suit was filed. The insurance

policy contained a provision that the insured "shall immediately

forward to the Company every demand, notice, summons, or other

process received by him or his representative." The policy also

stated, "[n]o action shall lie against the Company unless, as a

condition precedent thereto, there shall have been full

compliance with all of the terms of this policy . "

On July 11, 1988, plaintiffs were served with a Complaint

and Summons in U.S. District Court for the District of New

Hampshire. Plaintiffs contend that they mailed the Complaint and

Summons to the insurer on July 19, 1988. However, the insurer

claims that it did not receive them and denies that they were

mailed. The insurer did not file appearances on the plaintiffs'

behalf, and a default judgment was entered on March 8, 1989. The

3 insurer claims that it first received notice of the suit in May

1990. In June 1990, it denied plaintiffs' claim for coverage,

claiming, among other things, that the insurer had not received

timely notification of the commencement of the suit.

PROCEDURAL HISTORY

Plaintiffs brought this case in the New Hampshire Superior

Court as a petition for declaratory judgment pursuant to RSA

491:22.1 The defendant, relying on

, removed the

1RSA 491:22 provides:

Any person claiming a present legal or eguitable right or title may maintain a petition against any person claiming adversely to such right or title to determine the guestion as between the parties, and the court's judgment or decree thereon shall be conclusive. The district court shall have concurrent jurisdiction over such claims arising under its subject matter jurisdiction authority in RSA 502-A except that the defendant shall have the right to remove said declaratory judgment action to the superior court, subject to conditions established by rule of court, if the claim exceeds $1,500. The court of probate shall have exclusive jurisdiction over such claims arising under its subject matter jurisdiction authority in RSA 547 and RSA 552:7. No petition shall be maintained under this section to determine coverage of an insurance policy unless it is filed within 6 months after the filing of the writ which gives rise to the guestion; provided, however, that the foregoing

4 case to this court, and plaintiffs subsequently amended the

petition to add claims for breach of contract and bad faith and a

claim for a declaratory judgment pursuant to

.

Defendant challenged plaintiffs' RSA 491:22 claim through a

motion for partial summary judgment, arguing that plaintiffs

could not maintain a claim under the statute because the

underlying action had been brought in federal court. The court

rejected this argument and denied the defendant's motion in

orders dated July 2 and August 8, 1991.

The court then directed the parties to brief the question of

which side bears the burden of proof on the issue of timely

notice. Relying on RSA 491:22-a,2 plaintiffs argued that the

prohibition shall not apply where the facts giving rise to such coverage dispute are not known to, or reasonably discoverable by, the insurer until after expiration of such 6 month period; and provided, further, that the superior court may permit the filing of such a petition after such period upon a finding that the failure to file such petition was the result of accident, mistake, or misfortune and not due to neglect.

2RSA 491:22-a provides: "In any petition under RSA 491:22 to determine the coverage of a liability insurance policy, the burden of proof concerning the coverage shall be upon the insurer whether he institutes the petition or whether the claimant asserting the coverage institutes the petition."

5 burden of proof lies with the insurer. The defendant took a

contrary position and relied upon Lumbermens Mutual Casualty Co.

v. Oliver,

(1975), in which the New Hampshire

Supreme Court placed the burden of proving timely notice on the

policyholder without referring to RSA 491:22-a. Because it was

unclear whether Lumbermens Mutual Casualty Co. remains good law

in light of subseguent New Hampshire Supreme Court decisions

applying RSA 491:22-a to other insurance coverage guestions, the

court proposed to certify the burden of proof guestion to the New

Hampshire Supreme Court.

Before the issue was certified, however, the court issued an

Order guestioning the effect of the New Hampshire Supreme Court's

intervening decision in Scully's Auto-Marine Upholstery, Inc. v.

Peerless Insurance Co.,

(1992), on this court's prior

rulings denying defendant's motion for summary judgment. Because

the resolution of this issue could affect the burden of proof

guestion, the court deferred further action on the certification

issue and reguested briefs on whether the court should reconsider

its prior rulings on defendant's motion for partial summary

judgment.

6 DISCUSSION

I. Law of the Case

As things now stand, the court has held that the plaintiffs

are entitled to maintain a claim pursuant to RSA 491:22 and claim

the benefit of the burden shifting provisions of RSA 491:22-a.

Thus, as a threshold matter, the court must determine whether it

may reconsider this issue without violating the established law

of the case. "The law of the case doctrine makes binding upon a

court a ruling made by a court at the same or higher level during

prior stages of the same litigation, unless, of course, the

ruling has been reversed in the interim." Lacey v. Gardino, 7

(1st Cir. 1986) cert, denied, 107 S. C t . 284

(1986). Exceptions to the law of the case doctrine exist,

however, where there has been "a substantial change in the law

subseguent to the first decision," Home Placement Serv. v.

Providence Journal Co.,

(1st Cir. 1987), or

where the earlier decision is clearly erroneous and a substantial

injury would result from the continued application of the prior

ruling, Arizona v. California,

, 618 n.8 (1983).

The law of the case doctrine does not prevent

reconsideration of the court's prior ruling on defendant's motion

for partial summary judgment because the New Hampshire Supreme

7 Court's recent decision in Scully's Auto-Marine calls into

serious question the validity of the court's prior ruling. Since

an erroneous ruling on the issue would substantially injure the

interests of the losing party, the court finds that a sufficient

basis exists to reconsider the prior rulings.

II. Defendant's Motion for Partial Summary Judgment

In Scully's Auto-Marine, the New Hampshire Supreme Court

held that "RSA 491:22 applies only to underlying suits brought in

our State courts."

. Accordingly, the Court

affirmed the lower court's order dismissing a declaratory

judgment claim brought pursuant to RSA 491:22 because the

underlying actions giving rise to the claim had not been filed in

the New Hampshire state courts.

Plaintiffs argue that Scully's Auto-Marine is inapplicable

here because their right to rely on RSA 491:22 in the Federal

District Court for the District of New Hampshire is expressly

preserved by RSA 491:22-c, which provides that:

The remedy of declaratory judgment to determine the coverage of a liability insurance policy under RSA 491:22, 22-a, and 22-b shall also be available in the United States district court for the district of New Hampshire when that court may properly adjudicate the matter under the laws of the United States. In essence, plaintiffs' claim that the New Hampshire Legislature

intended to reward policyholders who are able to invoke the

jurisdiction of the federal courts by allowing them to bring a

claim pursuant to RSA 491:22 and obtain the benefits of the

burden shifting and attorneys fees provisions of RSA 491:22-a and

b3, even though similarly situated policyholders who are unable

to bring their declaratory judgment claims in federal court would

be denied such benefits as a result of the New Hampshire Supreme

Court's ruling in Scully's Auto-Marine.

The court declines to adopt plaintiff's construction of RSA

491:22-c for several reasons. First, the plain language of the

statute does not support plaintiffs' argument that the

legislature intended to provide a right of action that was

enforceable in federal court even though the same action could

not be brought in state court. To the contrary, the

legislature's statement in RSA 491:22-c, that the declaratory

judgment remedy "shall also be available in the United States

District Court for the District of New Hampshire," (emphasis

added) suggests only that the remedy should be available in

3RSA 491:22-b provides: "In an action to determine coverage of an insurance policy pursuant to RSA 491:22, if the insured prevails in such action, he shall receive court costs and reasonable attorneys' fees from the insurer." federal court when it is also available in state court.

Accordingly, plaintiffs can find no support for their position in

New Hampshire's primary rule of statutory construction that a

statute will be read as a whole and statutory terms will be given

their ordinary meaning. See Great Lakes Aircraft Co. v.

Claremont,

(1992) .

Second, the plaintiffs' interpretation of RSA 491:22-c would

arbitrarily favor policyholders who are able to sue in federal

court while punishing policyholders with similar claims who are

unable to invoke the federal court's limited jurisdiction to

resolve state contract disputes. The court can conceive of no

rational reasons to support such an interpretation and none have

been offered by the plaintiffs.4 Thus, in the absence of a clear

directive from the legislature, the court will decline to

interpret the statute to achieve such an arbitrary result. See

New England Brickmaster, Inc. v. Salem,

(1990).

41he mere fact that the underlying litigation is also pending in federal court is hardly sufficient to justify plaintiffs' construction of RSA 491:22-c. Many policyholders who are sued in federal court nevertheless may be unable to file their declaratory judgment claims in federal court because they are unable to invoke the court's diversity of citizenship jurisdiction. There is no rational reason why the legislature would choose to allow only those who can bring their declaratory judgment claims in federal court to claim the benefits of RSA 491:22 .

10 Finally, the interpretation of RSA 491:22-c proposed by

plaintiffs would raise a serious question concerning the

constitutionality of the statute in cases such as this, where an

out-of-state defendant would be severely penalized by operation

of state law if the defendant exercises its right under

to remove a claim against it to federal court. If

plaintiffs' interpretation of RSA 491:22-c were adopted, a

defendant's decision to remove a case to federal court would

result in the burden of proof being placed on the defendant

pursuant to RSA 491:22-a. It would also subject the defendant to

the potential of having to pay the policyholder's attorneys fees

pursuant to RSA 491:22-b. However, at least in cases where the

underlying action was filed in federal court, neither provision

would apply if the defendant left the claim in state court. The

Supremacy Clause to the United States Constitution prohibits a

state from passing legislation which would restrict or severely

punish a litigant for invoking the jurisdiction of the federal

court. Terral v. Burke Constr. Co . ,

(1922)

(foreign corporation cannot be deprived of license to do business

if it invokes the jurisdiction of the federal courts by filing an

action or removing a state court case to federal court); see also

Railway Co. v. Whitton's Administrator,

(1871)

11 (enforcement of state created wrongful death action cannot be

limited to state courts). In this case, plaintiffs'

interpretation of RSA 491:22-c would punish certain insurer

defendants who remove diverse claims to federal court by

subjecting them to burden shifting and the potential of attorneys

fees which they would not face if the case remained in state

court. The court declines to read the statute to reguire such a

result because it would call the constitutionality of the statute

into serious guestion. See State v. Johnson,

(1991) .

A more reasonable interpretation of RSA 491:22-c, and the

interpretation the court adopts, is that RSA 491:22-c merely

recognizes that where a right to rely on 491:22 exists in the

state court, that same right must be afforded to litigants who

are able to successfully invoke the diversity jurisdiction of the

federal courts. See Peterborough v. The Hartford Fire Ins. Co . ,

Civ. 92-50-SD, slip.op. (D.N.H. April 14, 1993)(Devine, J.); see

also Tital Holdings Syndicate, Inc.v. City of Keene, N.H . ,

, 273-74 n.8 (1st Cir. 1990) (noting that "whatever the

full effect of this amendment," RSA 491:22-c permits a claim

under RSA 491:22 et seg. to be maintained in federal court when

the underlying claim was brought in state court). Although it

12 does not afford plaintiffs the relief they seek, this

interpretation is consistent with the plain meaning of the

statute, gives the statute a purpose and effect that is not

irrational or arbitrary, and avoids the serious constitutional

guestion raised by the plaintiffs' interpretation of the statute.

Thus, the court rejects plaintiffs' proposed interpretation of

RSA 491:22-c and reconsiders its prior ruling on defendant's

motion for summary judgment. Plaintiffs' claim pursuant to RSA

491:22 is dismissed.

III. Burden of Proof

Even though plaintiffs' declaratory judgment claim must be

brought under

rather than RSA 491:22,

plaintiffs' claim, including the allocation of the burden of

proof, nevertheless will be governed by New Hampshire substantive

law. American Title Ins. Co. v. East West Financ. Corp.,

(1st Cir. 1992); Fireman's Fund Ins. Co. v.

Videofreeze Corp.,

(3rd Cir. 1976) .

However, the court will not look to RSA 491:22-a for an answer to

the burden of proof guestion because plaintiffs would not be

entitled to rely on RSA 491:22 et se g ., even if their claim had

remained in state court. Accord Peterborough v. The Hartford

13 Fire Ins. Co.,

,at *14-*19 (D.N.H. June

9, 1993). Instead, the court will follow New Hampshire contract

law in which the burden of proof has traditionally remained with

the party asserting that the contract has been breached. See

Markis v. Nolan,

(1975); see also The Travelers

Ins. Co. v. Greenbough,

(1937) (assigning the

burden of proof to the policyholder on a breach of contract

theory under declaratory judgment statute prior to the adoption

of RSA 491:22-a). This result is consistent with Lumbermens

Mutual Casualty Co., in which the New Hampshire Supreme Court

held that the burden proving that the insurer was afforded timely

notice of an occurrence rests with the policyholder. Thus, in

this case the plaintiffs will bear the burden of proving that

they fulfilled their notice obligations under the defendant's

policies.

Because the court has determined that RSA 491:22 et seg. may

not be relied upon by the plaintiffs, there is no longer a need

to resolve the apparent conflict between RSA 491:22-a and the New

Hampshire Supreme Court's opinion in Lumbermens Mutual Casualty

C o . by certifying this issue to the New Hampshire Supreme Court.

14 CONCLUSION

The court reconsiders its prior rulings denying defendant's

motion for partial summary judgment and grants the motion insofar

as it seeks the dismissal of plaintiffs' claims pursuant to RSA

491:22. The court further determines that the burden of proof

shall lie with the plaintiffs on the notice issue. The court's

proposal to certify the guestion to the New Hampshire Supreme

Court accordingly is moot.

SO ORDERED.

Paul Barbadoro United States District Judge

July 16, 1993

cc: John A. Lassey, Esg. Glenn R. Milner, Esg.

15