
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                 ____________________          No. 93-2352                  IN RE SAN JUAN DUPONT PLAZA HOTEL FIRE LITIGATION.                                      __________               AMERICAN INTERNATIONAL INSURANCE COMPANY OF PUERTO RICO                 and INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA,                             Cross-Claimants, Appellants,                                          v.                      AMERICAN NATIONAL FIRE INSURANCE COMPANY,                              Cross-Defendant, Appellee.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                           FOR THE DISTRICT OF PUERTO RICO                    [Hon. Raymond L. Acosta, U.S. District Judge]                                             ___________________                                 ____________________                                        Before                                Boudin, Circuit Judge,                                        _____________                            Bownes, Senior Circuit Judge,                                    ____________________                              and Stahl, Circuit Judge.                                         _____________                                 ____________________            Robert S. Frank, Jr. with whom Mark D. Cahill, Bret A. Fausett,            ____________________           ______________  _______________          Jeffrey A. Levinson, Choate, Hall & Stewart, William R. Kardaras,          ___________________  ______________________  ___________________          Louise A. Kelleher and  Cooper, Brown, Kardaras & Scharf  were on          __________________      ________________________________          briefs for  American International  Insurance  Company of  Puerto          Rico and Insurance Company of the State of Pennsylvania.            Kent  R. Keller with whom William A. Kurlander, John C. Holmes,            _______________           ____________________  ______________          J. Steven Bingman and Barger  & Wolen were on brief  for American          _________________     _______________          National Fire Insurance Company.                                 ____________________                                   January 27, 1995                                 ____________________                 BOUDIN, Circuit Judge.   This appeal  is a companion  to                         _____________            Lyon v.  Pacific Employees  Insurance Co., Nos.  93-2115, 93-            ____     ________________________________            2116,  which is decided today  in a separate  opinion.  Here,            appellants American International Insurance Company of Puerto            Rico  ("AIIC")   and  Insurance  Company  of   the  State  of            Pennsylvania  ("ISOP")  challenge  the district  court's  sua                                                                      ___            sponte grant  of summary judgment for  American National Fire            ______            Insurance  Company ("ANFIC")  on AIIC/ISOP's  cross-claim for            defense  costs.   The  appellants contend  that the  district            court's action  in granting  summary judgment sua  sponte was                                                          ___________            procedurally  flawed  because  they  had  no  notice  and  no            opportunity to present a defense.      AIIC and ISOP were the            primary general  liability insurers for the  Dupont Plaza and            related entities when the hotel fire occurred on December 31,            1986.   Their  insureds  included the  San Juan  Dupont Plaza            Corporation, Holders Capital  Corporation ("Holders"),  Hotel            Systems  International  ("HSI"),   Hotel  Equipment   Leasing            Associates ("HELA")  and William Lyon,  in his capacity  as a            shareholder  and  director  of   the  various  Dupont   Plaza            entities.1  As the  primary insurers for the hotel,  AIIC and                                            ____________________                 1Holders,  in which  Lyon  and others  had an  ownership            interest,  was   the  holding   company  for  various   hotel            operations.  HSI, a subsidiary of Holders, owned and operated            the  Dupont Plaza.  HELA  is a limited  partnership, in which            Lyon  was a limited  partner, that leased  hotel equipment to            various hotels including the Dupont Plaza.                                         -2-                                         -2-            ISOP  financed  the  hotel's  defense  of  the  massive  fire            litigation, expending over $40,000,000 in defense costs.                 At the time of  the fire, ANFIC was the  primary general            liability insurer for the  William Lyon Company, a California            residential construction and development company, and related            entities,  including  William  Lyon individually.    As  Lyon                                                                     ____            explains  in  detail,  Pacific  Employers  Insurance  Company            ("PEIC")  and  First State  Insurance  Company  ("FSIC") were            among several  excess insurers  for the William  Lyon Company            and its related insureds  at the time of the  fire, and their            coverage  provided additional  layers of protection  over and            above ANFIC's primary coverage.                 In  general, as  is typical  in excess  insurance cases,            PEIC and  FSIC provided  coverage similar to  ANFIC's primary            coverage.    Like  the  PEIC  and  FSIC  policies, the  ANFIC            policy's  only direct  link to  the Dupont  Plaza  was Lyon's            status as a named individual insured; no  Dupont Plaza entity            was  listed as an insured,  and no listed  insured other than            Lyon was involved in  the hotel business.  In  addition, like            the PEIC and  FSIC policies, the ANFIC policy  limited Lyon's            individual coverage to the conduct  of businesses of which he            was the "sole proprietor."                 Soon after the fire-injury suits began, Lyon and Holders            tendered their  defenses to ANFIC.   ANFIC  agreed to  defend            Lyon,  but reserved its rights to deny coverage on the ground                                         -3-                                         -3-            that Lyon had  not been  sued in an  insured capacity.  ANFIC            declined to  defend Holders on the  basis that it  was not an            insured.  In  April 1988, ANFIC filed  a declaratory judgment            action in a California federal court against Lyon and  others            to resolve the coverage issues.  This action was subsequently            consolidated  with the  multi-district  litigation in  Puerto            Rico and eventually dismissed without prejudice.                 AIIC,  ISOP  and ANFIC  were  all  eventually joined  as            defendants in the first phase of the fire-injury litigation--            AIIC  and ISOP in September  1987 and ANFIC  in January 1989.            In February 1989,  AIIC and ISOP filed a  cross-claim against            ANFIC,  seeking contribution  for their  costs  for defending            Lyon and  the other Dupont Plaza entities related to him.  In            May 1989, when phase I was resolved by settlement, AIIC, ISOP            and ANFIC all contributed their coverage limits as damages to            the victims' settlement fund--a  combined $1 million for AIIC            and  ISOP  and $1  million  for  ANFIC--with ANFIC  expressly            reserving  its  rights later  to  dispute  its obligation  to            contribute to defense costs.                 In  phase  III of  the  litigation,  the district  court            undertook the unenviable task  of sorting out the contractual            liabilities of the various insurers.  On December 7, 1992, in            Order No. 469,  the district  court ruled that  the PEIC  and            FSIC policies  did not cover the  fire-related obligations of            Lyon or any of the Dupont  Plaza entities connected to him, a                                         -4-                                         -4-            result that we have today affirmed in Lyon.  Since its policy                                                  ____            largely  paralleled the  PEIC  and FSIC  policies, ANFIC  was            encouraged by Order No.  469 to move for summary  judgment on            AIIC/ISOP's cross-claim for defense costs.                 Because the district court's  deadline for the filing of            pre-trial  motions had  long  since passed,  ANFIC was  first            required to obtain  the court's permission to file the motion            out of time.  On February 25, 1993, ANFIC filed a twelve-page            motion  seeking   leave   to  file   for  summary   judgment,            predicating its request on the identity of the issues decided            in  Order  No. 469.   The  motion  outlined the  substance of            ANFIC's  proposed summary  judgment  arguments and  presented            procedural arguments  why the court should  allow the belated            summary judgment filing.  ANFIC also requested that the court            establish  an  appropriate   briefing  schedule  for  summary            judgment filings.                   On March  9,  1993, AIIC  and  ISOP filed  a  seven-page            opposition to  ANFIC's motion  for leave, setting  forth both            procedural  and   substantive  grounds   for  denial.     The            opposition  briefly  urged  differences  between   a  primary            insurer's defense obligation and an excess insurer's coverage            obligation,  hoping  to distinguish  AIIC/ISOP's contribution            claim  against  ANFIC  from  the  liability  coverage  claims            asserted  by Holders  and Lyon  against PEIC  and FSIC.   The                                         -5-                                         -5-            opposition  did not  contain  any analysis  or discussion  of            California law on the duty to defend.                 In the event the court  granted ANFIC's motion for leave            to file, AIIC and ISOP requested similar permission to file a            cross-motion for  summary judgment to affirm  ANFIC's duty to            contribute to Lyon's  defense.   AIIC and ISOP  also filed  a            motion  seeking production  of  ANFIC's  underwriting  files,            claiming that those  files contained  admissions relating  to            ANFIC's obligation to defend  Lyon.  Although the motion  did            not identify the supposed admissions, on appeal AIIC and ISOP            suggest only that  the files might help establish  that ANFIC            was responsible  for including an allegedly ambiguous omnibus            clause in its policy.                 On September  2, 1993, the district  court entered Order            No. 495,  granting summary judgment for  ANFIC on AIIC/ISOP's            cross-claim for  defense costs.  Treating  ANFIC's motion for            leave to file as a request for summary judgment, the district            court ruled  that ANFIC's  primary policy, like  the parallel            PEIC and  FSIC policies,  did not  cover Lyon  or any of  the            Dupont Plaza  entities.  Because AIIC/ISOP's  cross-claim was            "distinct and separate from any remaining claims" in the fire            litigation,  the  court   entered  Final   Judgment  No.   12            dismissing the cross-claim  in its entirety.   The court also            dismissed AIIC/ISOP's request for production of documents  as            moot.  On October 8, 1993, in Order No. 506, the court denied                                         -6-                                         -6-            AIIC/ISOP's  timely  motion to  reconsider,  and  this appeal            followed.                 As a  preliminary matter, ANFIC argues  that this appeal            is  limited  to a  review  of Order  No.  506,  which is  the            district court's  denial of  the motion for  reconsideration,            and that  our inquiry is  therefore for  abuse of  discretion            only.  See,  e.g., Mariani-Giron v. Acevedo-Ruiz, 945 F.2d 1,                   ___   ____  _____________    ____________            3 (1st Cir. 1991).  ANFIC points to the fact that appellants'            notice  of appeal is entitled, "Notice of Appeal to the First            Circuit Court of Appeals From Order No. 506 of District Court            Judge Raymond L.  Acosta Dated  October 8, 1993."   AIIC  and            ISOP  contend Order  No.  495, the  district court's  summary            judgment ruling, is also before this court.                  An   appeal   from   the   denial  of   a   motion   for            reconsideration  is  not   an  appeal  from  the   underlying            judgment.   LeBlanc v. Great  American Ins. Co.,  6 F.3d 836,                        _______    ________________________            839 (1st Cir.  1993), cert.  denied, 114 S.  Ct. 1398  (1994)                                  _____  ______            (collecting  cases).   But we  have allowed "a  timely appeal            from the denial  of a  timely Rule 59(e)  motion to serve  as            notice of  an appeal  from the underlying  judgment in  cases            where the appellant's  intent to appeal from  the judgment is            clear."   Id.   A mistake  in designating  a judgment  in the                      ___            notice of appeal will not ordinarily result in a  loss of the            appeal  "as  long as  the intent  to  appeal from  a specific            judgment can be fairly inferred from the notice, and appellee                                         -7-                                         -7-            is  not misled by the mistake."   Kelly v. United States, 789                                              _____    _____________            F.2d 94, 96 n.3 (1st Cir. 1990).                 AIIC/ISOP's  notice  of  appeal   manifests  AIIC/ISOP's            intent  to appeal the summary  judgment ruling.   The body of            the notice referred to  Order No. 469 and Final  Judgment No.            12.  The  notice, filed  on November 1,  1993, following  the            district  court's  denial  of  the motion  to  reconsider  on            October 8, 1993, was  timely for an appeal  of Order No.  469            and Final Judgment No. 12.  See Fed. R. App. 4(a).  The title                                        ___            of the notice, which refers only to the motion to reconsider,            is  not dispositive,  and there  is no  claim that  ANFIC was            prejudiced in any way  by the mislabeled notice.   See Kotler                                                               ___ ______            v. American Tobacco Co., 981 F.2d 7, 11-12 (1st Cir. 1992).                 ____________________                 We turn  now to the  district court's decision  to grant            summary  judgment in favor of ANFIC.  When the district court            granted  summary judgment,  there  was no  formal motion  for            summary judgment pending before it;  it had only the  ANFIC's            motion   requesting  leave   to  file  and   the  AIIC/ISOP's            opposition.  These filings  did outline the substance  of the            parties'  respective  positions on  the  merits.   Still,  in            formal terms, the district court's ruling was "the functional            equivalent  of  a  sua  sponte grant  of  summary  judgment."                               ___________            Stella v. Town of Tewksbury, 4 F.3d 53, 55 (1st Cir. 1993).            ______    _________________                 In Stella, we recognized that a district court can grant                    ______            summary  judgment  on its  own  initiative  so  long  as  the                                         -8-                                         -8-            parties' procedural interests are  protected.  4 F.3d  at 55.            In particular, discovery  must be far enough examined  to let            the court accurately decide  whether there are genuine issues            of  material  fact  and to  make  the  parties  aware of  the            evidence that they can  adduce.  Id.  Further,  the litigants                                             ___            need  notice from  the  district court  of  its intention  to            consider  a grant of summary  judgment, so that the litigants            can present their arguments and their evidence.  Id.                _______                                      ___                 In this case, there was  on the one hand no notice  that            the  district  court  was  considering  a  grant  of  summary            judgment,  for the only  issue pending was  whether the court            would  grant permission to file such  a motion.  On the other            hand, the parties in the course of presenting their positions            on the  latter issue also revealed  much of what they  had to            say on the substance of the merits of summary judgment.   The            matter is further complicated because AIIC/ISOP also took the            position  that,  before  responding  to  a  summary  judgment            motion,  they  needed   additional  discovery  in   order  to            illuminate the question who drafted the omnibus clause in the            ANFIC policy.                 If we  were completely  certain that  the merits  of the            summary  judgment  issue  had  been fully  presented  to  the                                                _____            district  court, it  might be  reasonable to  conclude either            that the  essence of the  Stella notice requirement  had been                                      ______            satisfied or  that the  failure to  satisfy it was  harmless.                                         -9-                                         -9-            See Stella, 4 F.3d at 56 n.4.  Further, our own opinion today            ___ ______            in the companion case significantly limits the arguments left            open to  AIIC/ISOP and also  appears to render  its discovery            request  irrelevant.   But  there  does  remain unresolved  a            significant  legal  issue,  not  squarely  addressed  by  the            district court, so we are persuaded that a remand is the most            appropriate solution.                 Broadly speaking, as to coverage  for liability, ANFIC's            position appears to be  materially identical to that of  PEIC            and  FSIC decided in the companion Lyon case.  The reasons we                                               ____            have  given in that case  for exculpating PEIC  and FSIC make            clear that  claims of liability  coverage by Lyon  or Holders            against  ANFIC   would  also  fail.     The  sole  proprietor            endorsement  appears in the ANFIC policy, and we have held in            Lyon that  this endorsement  limits claims under  the omnibus            ____            clause without regard  to who drafted  the provisions.   Yet,            there is a further argument, vigorously pressed by AIIC/ISOP,            that  the duty to defend under California law is broader than            the  duty  to  indemnify  and applies  wherever  a  liability            coverage  claim  has  "potential"  validity  even  though  it            ultimately fails.                 There is apparently no dispute that under California law            the duty to  defend is  broader than the  duty to  indemnify.            Horace Mann Ins. Co. v.  Barbara B., 846 P.2d 792,  795 (Cal.            ____________________     __________            1993).    AIIC/ISOP  say  that wherever  there  is  potential                                         -10-                                         -10-            coverage  under a  policy--by potential  they appear  to mean            "arguable"--the duty to defend exists.  All parties also seem            to  assume that, if there was a  duty on the part of ANFIC to            defend at the outset,  then it is liable for  contribution to            the defense  costs even if  the potential claim  of liability            coverage  is later resolved in the  negative.  Montrose Chem.                                                           ______________            Corp.  of Cal. v. Superior  Court, 861 P.2d  1153, 1157 (Cal.            ______________    _______________            1973); Continental Casualty Co. v. Zurich Ins.  Co., 366 P.2d                   ________________________    ________________            455, 461 (Cal. 1961).                 ANFIC, however, says that the duty to defend in arguable            cases does not extend to those  in which the dispute is about            whether the  putative insured  is actually insured  under the            policy;  and  ANFIC cites  California  cases  that it  thinks            support its position.  Wint v.  Fidelity & Cas. Co., 507 P.2d                                   ____     ___________________            1383,  1388 (Cal.  1973); McLaughlin  v. National  Union Fire                                      __________     ____________________            Ins. Co. of  Pittsburgh, Pa., 29 Cal. Rptr. 2d 559, 570 (Cal.            ____________________________            Ct. App. 1994).   ANFIC also seems  to think that it  matters            that (in its  view) the burden of proof  to establish that an            individual  or company is protected  by a policy  is upon the            claimant,  whereas proving  that a  restriction or  exclusion            applies is upon the insurer.                 We  are  doubtful whether  this  supposed  difference in            burden of  proof matters in a case in which the facts are not            in  dispute, but  the  extent of  the  duty to  defend  under            California law  may be a debatable  point.  While law  on the                                         -11-                                         -11-            duty to defend in  potential coverage cases might  be limited            in  the fashion that ANFIC suggests, it is also possible that            the  duty to  defend exists  in any  case in  which there  is            arguably coverage,  regardless of what policy  language is in            dispute.   In  the alternative,  perhaps the  duty to  defend            exists  at  least  where  the  defendant  in  the  underlying            liability  litigation is a named  insured, and the dispute as            to coverage turns on whether the insured is sued in a covered            "capacity."                  Assuming there is a duty to defend in arguable cases and            that ANFIC's  distinction between types of  disputes does not            wash,  the question  would remain  whether coverage  here was            arguable.  While our  reading of the policy language  in Lyon                                                                     ____            may somewhat impair AIIC/ISOP's position,  nevertheless under            California  law the duty to  defend is evaluated  in terms of            likelihoods  at the outset of  litigation.  See, e.g., Horace                                ______                  ___  ____  ______            Mann, 846 P.2d  at 795.   A court's  later conclusion that  a            ____            provision should be read one way, and that extrinsic evidence            is  beside  the point,  does  not necessarily  mean  that the            contrary  view  was inarguable.    The  standard  of what  is            arguable is itself a matter of California law.                 Although  the   issues  as   we  have  posed   them  are            essentially  legal ones,  there  are numerous  reasons why  a            remand is appropriate so the district court can  consider the            matter in the  first instance.   Discovery aside,  it is  not                                         -12-                                         -12-            completely clear  that the parties have  said everything they            can  about the "merits," since  much of the  briefing in this            court  has  been  directed  to the  procedural  propriety  of            summary judgment  and not to the merits.   Since the reach of            California law on the duty to defend is disputed, our concern            that  the parties may not  have mustered all  of their merits            arguments and citations is not a formality.                 Further, we are not wholly certain that our narrowing of            the issues is justified.   Although our companion opinion  in            Lyon  probably eliminates  any  basis for  concern about  who            ____            drafted the omnibus clause  in the ANFIC policy, none  of the            litigants has  had an  opportunity to  address this  issue in            light of  Lyon.   Similarly,  we are  skeptical that  ANFIC's                      ____            willingness  to  assume  Lyon's  defense  in  the  underlying            litigation is  much of  an admission vis-a-vis  the AIIC/ISOP            claim;  as ANFIC  points out,  it could  be subject  to harsh            penalties  under California law  if it  breached the  duty to            defend.  Still, the presence of this kind of dangling dispute            shows why the wiser course is to remand.                 Finally, although  we are reluctant to  prolong what has            been extraordinarily burdensome litigation,  no judge on this            panel  compares  to  the  presiding  district  judge  in  his            familiarity with  the facts, the procedural  history, and the            possible ramifications  of California law in  relation to the            dispute.  The district court did  not in its grant of summary                                         -13-                                         -13-            judgment discuss the  asserted distinctions between the  duty            to indemnify  and a duty to defend or their connection to the            claims  of contribution  pressed by  AIIC/ISOP in  this case.            This is one more reason why a remand is the wiser outcome.                 On  remand, we think that the proper course would be for            the  district court to invite  ANFIC to file  a formal motion            for summary judgment and to allow AIIC/ISOP to file papers in            opposition,  or a cross-motion  in their own  favor, or both.            If  any party  wishes to  claim that additional  discovery is            necessary, it  is free to do  so.  As already  noted, we have            not  discerned any  obvious factual issues  requiring further            discovery  but  the  district  court  is  free  to  determine            otherwise  after  the  parties  have had  an  opportunity  to            present their positions.                 The  judgment  is  vacated  and the  case  remanded  for                                    _______                 ________            further proceedings in accordance with this opinion.                                         -14-                                         -14-
