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Zurich American Insurance Co. v. Covil Corp.

United States District Court, M.D. North Carolina

July 16, 2019

COVIL CORPORATION, by and through its duly-appointed receiver, Peter D. Protopapas, et. al., Defendants.


          Catherine C. Eagles, District Judge.

         In this diversity case, Zurich American Insurance Company seeks declarations as to the scope and limits of its obligations to its insured, Covil Corporation, in lawsuits arising from Covil's sale or installation of asbestos-containing materials. Zurich also sued a North Carolina estate with a judgment against Covil, several North Carolina claimants with pending asbestos lawsuits against Covil, and a number of other insurance companies that may also have provided coverage to Covil. Some of the insurers have filed counterclaims or crossclaims seeking declarations of their coverage obligations.

         Covil, acting through a Receiver appointed in South Carolina state court, and the NC claimants move to dismiss the complaint and crossclaims or, in the alternative, to stay this lawsuit or abstain pending resolution of a similar suit instituted by the Receiver in South Carolina against most of the same insurance companies. Covil[1] contends that the Receiver and South Carolina citizens with claims against Covil that are potentially covered by the insurance policies at issue are all necessary parties to this litigation. Thus, Covil contends, the case should either be dismissed for failure to join indispensable parties or because, if these parties are joined and properly aligned, diversity of citizenship does not exist.

         For the reasons that follow, Covil's motions to dismiss and to abstain will be denied. Its alternative motions to stay remain under consideration.

         I. Background

         For many years, Covil, a South Carolina corporation, sold and distributed insulation products, including products that contained asbestos. See, e.g., Finch v. Covil Corp., __ F.Supp.3d __, 2019 WL 1934523, at *2-5 (M.D. N.C. May 1, 2019). There are several personal injury suits against Covil in North and South Carolina relating to the distribution and/or installation of asbestos-containing products. See, e.g., Mullinax v. Advance Auto Parts, Inc., No. 1:16-cv-310 (W.D. N.C. Sept. 19, 2016); Connor v. Norfolk S. Ry. Co., No. 1:17-cv-127 (M.D. N.C. Feb. 15, 2017); Ellis v. Bridgestone Ams., Inc., No. 1:17-cv-942 (M.D. N.C. Oct. 18, 2017); Whitehead v. Air & Liquid Sys. Corp., No. 1:18-cv-91 (M.D. N.C. Feb. 9, 2018); Doc. 8-2 at ¶¶ 19-22. At least two courts--this court and a South Carolina state court--have entered judgments against Covil. See Final Amended Judgment, Finch v. Covil Corp., No. 1:16-cv-1077, Doc. 525 (M.D. N.C. May 1, 2019); Doc. 8-2 at ¶ 21.

         Covil was dissolved in 1993. Doc. 26-1 at 2. It appears undisputed that Covil has no officers, directors, or employees capable of taking the actions required to obtain counsel or file or defend any lawsuit and that, until recently, three of Covil's insurers-- Zurich, Sentry Casualty Company, and United States Fidelity and Guaranty Company-- controlled Covil's defense in any underlying asbestos litigation. See Doc. 8 at 5-6; Doc. 25 at 2-3; Doc. 26 at 2; Doc. 41 at 1 (adopting Docs. 25 and 26).

         In October 2018, after a five-day trial in this Court, a jury awarded $32, 700, 000 to one of the defendants here, Ann Finch, executor of the estate of Franklin Finch, in a wrongful death suit against Covil. See Final Judgment, Finch, No. 1:16-cv-1077, Doc. 492.[2] The jury found that Mr. Finch developed mesothelioma as a result of exposure to asbestos-containing insulation Covil sold to his employer. See Finch, 2019 WL 1934523, at *1, 5-7.

         Soon thereafter, in one of the lawsuits against Covil in South Carolina state court, the plaintiffs moved for appointment of a receiver. See Doc. 8-1 at 2. On November 2, 2018, the state court appointed a receiver to administer Covil's assets. See Id. at 2-4 (November 2, 2018 order of Chief Justice Toal).

         Four days later, on November 6, 2018, Zurich brought the instant lawsuit in this Court against Covil, other insurers who may provide coverage to Covil, the Finch estate, and several North Carolina citizens who are claimants against Covil or the personal representatives of claimants in asbestos suits in North Carolina federal courts. Doc. 1. The complaint, as well as several counterclaims and crossclaims filed by insurers, seeks declarations limiting and apportioning among the insurers their obligations, if any, to cover Covil's defense costs and indemnify Covil for the Finch judgment and potential future judgments relating to its sale of asbestos. See Id. at ¶¶ 37-57, pp. 11-12 ¶¶ 1-8; Doc. 10 at ¶¶ 81-113, pp. 19-20 ¶¶ (a)-(j); Doc. 12 at ¶¶ 73-99, pp. 12-13 ¶¶ (A)-(K); Doc. 19 at pp. 14-15 ¶¶ 35-43, p. 16 ¶¶ (A)-(E).

         On November 21, 2018, the Receiver filed suit on behalf of Covil in South Carolina state court against the insurance companies that are parties here, an additional insurance company, [3] and several South Carolina citizens who are claimants against Covil or the personal representatives of claimants in underlying asbestos suits in South Carolina state courts. See Doc. 8-2 at ¶¶ 12-22, p. 26. The complaint asserts breach of contract and bad faith claims against several insurers, requesting as damages that they be held jointly and severally liable for the Finch judgment; a claim against the insurers seeking declarations of their coverage obligations under certain policies issued to Covil, specifically as they apply to the underlying asbestos suits; a claim against the S.C. claimants for a declaration limiting their recovery against Covil in certain ways given that the insurance policies are Covil's only assets; and an “anti-suit injunction” prohibiting Zurich from prosecuting this lawsuit in the Middle District of North Carolina. Id. at ¶¶ 43-76.

         On December 6, 2018, Sentry removed the South Carolina case brought by the Receiver to the United States District Court for the District of South Carolina. See Notice of Removal, Covil Corp. v. Zurich Am. Ins. Co., No. 7:18-cv-03291-BHH, Doc. 1 (D.S.C.). Sentry also filed a motion to realign the parties. Motion to Realign the Co-Defendants, Covil Corp., No. 7:18-cv-03291-BHH, Doc. 4. On December 20, Covil moved to remand for lack of subject matter jurisdiction due to a lack of diversity. Motion to Remand to State Court, Covil Corp., No. 7:18-cv-03291-BHH, Doc. 12. On June 14, 2019, the district court granted Sentry's motion and realigned the S.C. claimants as plaintiffs with Covil against the defendant-insurers. Order, Covil Corp., No. 7:18-cv-03291-BHH, Doc. 67. Because the realignment established diversity jurisdiction, the Court denied Covil's motion for remand. Id. at 9-10.

         The Court will address additional facts as needed in the context of the issues presented.

         II. Covil's Motion to Dismiss for Failure to Join Indispensable Parties [4]

         a. The Receiver is not a Necessary or Indispensable Party

         Covil first maintains that the Receiver is a necessary and indispensable party to this litigation and that Zurich's failure to join the Receiver as a defendant is grounds for dismissal. Doc. 8 at 11-12. The burden is on Covil to show that the Receiver is a necessary party. Superior Perfs., Inc. v. Ewing, No. 1:14cv232, 2015 WL 790371, at *4 (M.D. N.C. Feb. 25, 2015).[5]

         By statute, South Carolina law provides that a dissolved corporation can sue or be sued in its own name, notwithstanding the fact that it is dissolved. S.C. Code. § 33-14-105(c)(5). But there is little, if any, case law discussing how a corporation with no officers, directors, or employees can obtain counsel authorized to act on the corporation's behalf or take the actions required to prosecute or defend a lawsuit.

         Covil appears in this lawsuit through the Receiver. The Receiver filed the pending motions to dismiss on behalf of Covil, which explicitly state that Covil is “acting solely by and through its duly appointed receiver.” Doc. 7 at 1. The Receiver waived service of process for Covil, Doc. 49, has filed briefs and motions on behalf of Covil, Docs. 7, 8, 28, 29, 34, 35, 36, 37, 40, 62, and counsel for Covil “acting through [the] Receiver of Covil Corporation” has “request[ed] that all pleadings and papers [for Covil] be served” on them. Docs. 56, 57, 58, 60.

         Indeed, the parties agree that the Receiver can and is acting on Covil's behalf pursuant to his appointment by the South Carolina court. That order gave the Receiver “the power and authority to fully administer all assets of Covil, ” including but not limited to “the right and obligation to administer any insurance assets of Covil . . . as well as any claims related to the actions or failure to act of Covil's insurance carriers.” Doc. 8-1 at 2; see also Kirven v. Lawrence, 137 S.E.2d 764, 768 (S.C. 1964) (“A receiver . . . has no power other than that given him by the Order of appointment.”); In re Fifty-Four First Mortg. Bonds, 15 S.C. 304, 314 (1881) (“The authority of a receiver rests only in the orders of the court by which he is appointed.”).[6] This implicitly but nonetheless clearly includes the authority to obtain and maximize insurance coverage through litigation on Covil's behalf.

         As the Receiver is fully participating in this litigation on behalf of Covil, there is little reason to make the Receiver a separate party. “[S]uits against receivers are normally brought against the receivership entity or the property in receivership, not the receiver personally.” 2 Business & Commercial Litigation in Federal Courts § 17:87 (4th ed. Nov. 2018 update) (collecting authorities). “A receiver has no unqualified right to appear and defend when he or she has not been made a party, and whether the receiver should be allowed to appear and defend actions is addressed to the sound discretion of the court.” 75 Corpus Juris Secundum Receivers § 412 (June 2019 update). The Receiver has asserted no interest in the subject of this declaratory judgment action outside his capacity as Covil's Receiver, and there are no claims against him personally or in his capacity as Receiver. Disposing of the action without joining the Receiver as a separate party will not “impair or impede [his] ability to protect” any interest of his or “leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations.” Fed.R.Civ.P. 19(a)(1)(B). Further, there is no indication that the Court cannot “accord complete relief among the existing parties” without joining the Receiver ...

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