Case 2:03-cv-06267-NS Document 2-1 Filed 12/05/03 Page 1 of 14

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

)
GOULD PAPER CORPORATION (as successor-in- )
interest to Hawthorne Paper Company) ) CIVIL ACTION NO.
11 Madison Avenue )
New York, NY 10010 ) 2:03cv6267
Plaintiff, )
v. )
)
INSURANCE COMPANY OF NORTH AMERICA )
One Liberty Place )
1601 Chestnut Street )
Philadelphia, PA 19103 )
) MEMORANDUM OF LAW
ACE USA ) IN SUPPORT OF
1209 Orange Street ) DEFENDANTS’ MOTION
Wilmington, DE 19801 ) TO DISMISS, STAY OR
) TRANSFER VENUE OF
CENTURY INDEMNITY CO. ) THE CASE
One Liberty Place )
1601 Chestnut Street )
Philadelphia, PA 19103 )
)
Defendants. )
___________________________________________

INTRODUCTION

Defendants Century Indemnity Company (“Century”) and Insurance Company of North

America (“INA”)1 (collectively “Defendants”) submit this memorandum in support of their

motion seeking alternatively that the Court dismiss, stay or transfer venue of the case at bar in

preference to a first-filed case pending in the federal district court for the Western District of

Michigan. The present case raises the same core facts and issues with respect to the same

1
The complaint filed in this matter also improperly names as a purported defendant “ACE USA.” As set forth in the
accompanying Affidavit of Joseph Stagliano, however, “ACE USA” is not the name of a legal entity that can sue or
be sued. Rather, it is a market identifier and brand name used by the ACE Group of Companies in the United States.
Therefore, “ACE USA” should be dismissed from this action, in any event.
 Case 2:03-cv-06267-NS Document 2-1 Filed 12/05/03 Page 2 of 14

principle parties as is presented in the earlier filed Michigan action and therefore creates a

needlessly duplicative proceeding that should not be permitted to continue.

There are several separate grounds for granting Defendants the relief they seek. First,

under the “first-filed rule,” as a matter of comity and judicial efficiency, in cases of concurrent

federal jurisdiction involving the same parties and the same issues, the court of first-filing must

decide the matter, barring unusual or exceptional circumstances that are not presented here.

Second, under Rule 13(a) of the Federal Rules of Civil Procedure, if a counterclaim arises out of

the same transaction or occurrence as is the subject of the initial complaint, it must be brought as

a counterclaim in the original proceeding, and cannot be raised in a separate (and invariably

subsequent) complaint filed in another court. Third, given the preference for the first-filed

forum, if this matter is neither dismissed nor stayed, it should be transferred to the Michigan

court, which is a proper and appropriate venue for resolving all of the issues.

FACTUAL BACKGROUND

On November 7, 2003, Century filed a complaint against Gould Paper Corporation

(“Gould”), the plaintiff herein, in the federal district court for the Western District of Michigan

seeking declaratory relief. (See Affidavit of Lawrence A. Serlin (“Serlin Aff.”), Ex. A) One

week later, on November 14, 2003, Gould filed a competing complaint in this Court against

Century, INA and ACE USA seeking declaratory relief and asserting claims for alleged breach

of contract, bad faith, and breach of fiduciary duty. (Serlin Aff., Ex. B) The essence of both the

Michigan and Pennsylvania federal court complaints is Gould’s claim for coverage under certain

liability insurance policies allegedly issued by INA (as predecessor to Century) to Hawthorne

Paper Company (“Hawthorne”) (a predecessor of Gould). Gould’s insurance coverage claim, in

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turn, arises in both instances from an underlying personal injury claim asserted against Gould by

a former Hawthorne employee, Mr. Douglas McCarthy.

The same core set of facts give rise to both lawsuits. Those facts include that:

• Four primary insurance policies and three excess insurance policies allegedly were

issued to Hawthorne by INA during the period from June 1965 through March 1976

(compare Serlin Aff., Ex. A at ¶ 10 with Serlin Aff., Ex. B at ¶¶ 17, 20);

• At all relevant times, Hawthorne operated a paper mill in Kalamazoo, Michigan

(compare Serlin Aff., Ex. A at ¶ 7 with Serlin Aff., Ex. B at ¶ 8);

• Gould acquired Hawthorne in 1969 (compare Serlin Aff., Ex. A at ¶ 7 with Serlin

Aff., Ex. B at ¶ 8);

• Mr. McCarthy filed a lawsuit against Gould in California in July 2001 alleging that he

developed mesothelioma as a result of exposure to asbestos dryer felts while

employed at the Hawthorne mill in Michigan decades earlier (compare Serlin Aff.,

Ex. A at ¶ 7 with Serlin Aff., Ex. B at ¶ 9-10); and

• Mr. McCarthy’s claim was eventually settled by Gould on or about May 20, 2002 for

$2.3 million (compare Serlin Aff., Ex. A at ¶ 9 with Serlin Aff., Ex. B at ¶ 14).

The central issue in the two competing lawsuits is identical – namely, whether coverage

is owed to Gould under the INA policies, as applied to the facts of Mr. McCarthy’s underlying

claim.

• Century contends in its first-filed Michigan complaint that it is not liable to provide

coverage to Gould under the INA policies on the basis of various defenses, including

exclusions for claims for which a remedy is provided by workers compensation, by

exclusions for bodily injury to an employee in the course of and arising out of his

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employment, and because Gould failed to obtain Century’s consent before entering

into the $2.3 million settlement with Mr. McCarthy (see Serlin Aff., Ex. A at ¶ 13).

Century further contends that any liability on its part, which it denies, must in any

event be pro-rated based upon its relative “time on the risk” in comparison to

coverage periods of other insurers of Hawthorne and Gould (see Serlin Aff., Ex. A at

¶ 14).

• Gould contends in its subsequently filed Pennsylvania complaint that the sums it has

expended in defending the suit by Mr. McCarthy (referenced as the “Underlying

Action”) as well as its payments to settle the claim are within the coverage of the

policies (see Serlin Aff. Ex. B at ¶¶ 51-56).

Various offshoots of the central issue of coverage under the INA policies are also set

forth in the two complaints. Gould’s Pennsylvania action adds INA as a defendant (as well as

erroneously attempting to assert claims against what it refers to as “ACE USA”), and asserts

claims of bad faith and breach of fiduciary duty in connection with the alleged failure to provide

coverage under the INA policies. The Michigan suit filed by Century adds as defendants other

insurers or potential insurers of Gould in order to more completely resolve the potential coverage

issues, in the event that any coverage is found to be owed at all under the INA policies.

ARGUMENT

I. THE “FIRST-FILED” RULE APPROPRIATELY APPLIES AND BARS THIS

COURT FROM PROCEEDING WITH THIS SECOND-FILED CASE.

A. The Circumstances of the Michigan and Pennsylvania Suits Satisfy All of the
Requirements of the First-Filed Rule.

There can be no dispute that Century’s complaint filed in the federal district court in

Western Michigan preceded Gould’s filing of a complaint in this Court by one week. Likewise,

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it is clear that the competing actions initiated by the filing of these two complaints are pending in

federal courts of equal jurisdiction. Where such actions implicate the same parties and the same

issues, it has long been recognized that the court which first has possession of the subject must

decide it. See, e.g., Crosley Corp. v. Hazeltine Corp., 122 F.2d 925, 929-30 (3rd Cir. 1941). This

concept is referred to as the “first-filed rule.”

The first-filed rule provides a bright-line method of selecting which of two competing

cases should be enjoined in order to ensure judicial economy and harmony. As recently noted by

Judge Joyner in American Society for Testing & Materials v. Corrpro Companies, Inc., 254 F.

Supp.2d 578, 580 (E.D. Pa. 2003):

The “first-filed rule” stands for the proposition that in all cases of federal concurrent
jurisdiction, the court which first has possession of the subject must decide it. IMS
Health, Inc. v. Vality Tech., Inc., 59 F. Supp.2d 454, 463 (E.D. Pa. 1999). Indeed, the
Third Circuit has found that the “first-filed rule” encourages sound judicial
administration and promotes comity among federal courts of equal rank. E.E.O.C. v.
University of Pennsylvania, 850 F.2d 969, 971 (3d Cir. 1988). It gives a court the power
to enjoin the subsequent prosecution of proceedings involving the same parties and the
same issues already before another district court. Id. [additional citations omitted]

Accord, e.g., Rightime Econometrics, Inc. v. Ashworth, 1995 WL 613093, *5 (E.D. Pa.) (Shapiro,

J.) (Serlin Aff., Ex. C).

The first-filed rule applies in this instance because the Michigan and Pennsylvania

matters, at their core, involve entirely the same parties and issues. In both suits, Century and

Gould are the principal parties. The key issue in each case is whether coverage is owed by

Century (as the successor to INA’s liabilities) under the INA policies issued during the 1960s

and 1970s to Gould’s predecessor, Hawthorne, with respect to the underlying claim brought by

Mr. McCarthy. Additional claims by Gould in its Pennsylvania complaint of bad faith and

breach of fiduciary duty, and the addition of INA as a party, are merely tangential to the

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threshold issue of whether coverage is owed under the policies.2 Indeed, without a finding of a

duty to defend and/or indemnify, Gould’s other claims will fall by the wayside. Similarly,

Century’s inclusion of other insurers as defendants along with Gould in its Michigan suit allows

for a more comprehensive result by way of allocation of liability, but only in the event that

Century is found to have any liability in the first instance. It is readily apparent, therefore, that

the commonality of key parties and issues presented by the two cases overwhelms any peripheral

differences that may otherwise exist.

B. No Rare and Limited Exception to the First-Filed Rule Arises from

Century’s Filing Suit in Michigan, Which Is a Proper Forum for Resolving
the Coverage Dispute.

None of the recognized possible exceptions to the first-filed rule is presented by the

circumstances here. As the Third Circuit has emphatically observed, a federal district court’s

invocation of the “first-filed rule” is the norm, not the exception. E.E.O.C., supra at 979. While

the rule is not to be applied woodenly, departures from its application are “rare” and a second

action should proceed only in “exceptional circumstances.” Id. at 971, 979. The limited

exceptions to the first-filed rule include bad faith in the filing of the first-filed action, forum

shopping as the motivation for the filing of the first action, the second-filed suit being further

developed than the first at the time the motion is made, and the filing of the first suit in one

forum to preempt the opponent’s imminent filing of a suit in a different, less favorable forum.

E.g., Stone Creek Mechanical, Inc. v. Carnes Co., Inc., 2002 WL 31424390, *2 (E.D. Pa.)

(Serlin Aff., Ex. D). There is no evidence to support an assertion that Century engaged in any

2
As previously noted, Gould also erroneously attempts to name “ACE USA” as a defendant in the instant suit.

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such inequitable conduct in filing suit in Michigan prior to Gould’s filing in Pennsylvania,

although it can reasonably be expected that Gould will make such an assertion anyway.3

In anticipation of Gould’s arguments, however, it should be noted that Michigan is a

proper and appropriate forum for the resolution of the issues presented. All of the INA policies

in question were issued to Hawthorne, which operated the paper mill in Kalamazoo, Michigan at

the time. Mr. McCarthy’s bodily injury claim, which gives rise to and forms the basis of Gould’s

claim for insurance coverage, arose from his alleged exposure to asbestos during the period of

his employment with Hawthorne at the Michigan plant site. Under federal venue requirements

for diversity cases, such as this one, an action may be brought in “a judicial district in which a

substantial part of the events or omissions giving rise to the claim occurred.” 28 U.S.C. § 1391.

Here, it is apparent that a substantial part of the events that give rise to the claim took place in

Michigan.

Under similar circumstances, the First Circuit recently held that the locale of an

underlying casualty loss is an appropriate venue for a claim seeking insurance coverage for such

loss. In Uffner v. La Reunion Francaise, S.A., 244 F.3d 38 (1st Cir. 2001), the Court considered

whether venue was proper where a claim for insurance coverage, brought on the basis of

diversity jurisdiction, was filed in federal district court in Puerto Rico. The insurance claim

arose from a fire on a yacht, and its subsequent sinking, while located off the coast of Puerto

Rico. The insurance in question had been issued by a French insurer, an underwriter based in

England and an underwriting agent located in Georgia. The insured was a resident of the Virgin

3
Rather than attempt to prove a negative, Century will await Gould’s response to this motion before arguing the
specific inapplicability of any potential exception to the first-filed rule on which Gould may choose to rely. Suffice
it to state for the time being, however, that Century did not engage in any bad faith regarding its dealings with Gould
in connection with its filing suit in Michigan, the filing was not indicative of “forum shopping” since Michigan
clearly is an appropriate forum for suit and there is no other forum that is obviously superior or preferable, this
second-filed suit in Pennsylvania has not advanced farther than the first-filed Michigan action in that both have only
just been filed, and there is no evidence that Century filed its suit due to an awareness of an imminent intent by
Gould to file suit in a less favorable forum.

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Islands. Under these circumstances, the trial court opined that Puerto Rico had only a tenuous

connection at best because, in its view, the insurance claim sounded in contract rather than tort,

and, as such, was wholly unrelated to Puerto Rico. It also observed that the “triggering event”

was the denial of the claim and that the issue at bar was the interpretation of the contract.4 The

contract, the trial court further noted, was neither negotiated nor formed in Puerto Rico.

The Appellate Court disagreed with the lower court and held instead that the occurrence

of the loss giving rise to the insurance claim, although not directly related to resolving the

coverage issue and not itself a matter in dispute, was nevertheless a “substantial part” of the

sequence of events underlying the claim. As such, the location of the loss was sufficient to

warrant venue in Puerto Rico. Id. at 42-43. The Court reasoned that under the current form of

the federal venue provision, it was only necessary to establish that the sinking of the yacht “was

one part of the historical predicate for the instant suit.” Id. at 42.5

The Uffner Court noted that recent changes in the federal venue provision dictated the

conclusion that venue was proper in the district where the loss giving rise to the insurance claim

occurred. The Court observed that prior to 1990, Section 1391(a) provided venue in “the judicial

district … in which the claim arose.” That provision was amended to its current form because it

generated wasteful litigation whenever several different forums were involved in the transaction

leading up to the dispute, as well as a plethora of tests to determine the single venue in which the

claim “arose.” The Court noted that, “[b]y contrast, many circuits have interpreted the 1990

amendment as evincing Congress’s recognition that when the events underlying a claim have

taken place in different places, venue may be proper in any number of districts.” Id. See also

Park Inn International, L.L.C. v. Mody Enterprises, Inc., 105 F. Supp.2d 370, 376 (D.N.J. 2000)

4
As in the present case, the policyholder in Uffner also asserted a claim for “bad faith” denial of his insurance claim.
5
In much the same way, Mr. McCarthy’s exposure to asbestos while working at Hawthorne’s paper mill in
Michigan is one part of the historical predicate of the Michigan suit filed by Century.

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(holding that venue only requires that a “substantial part” of the events occur in the District, not a

majority of events, nor that the challenged forum be the best forum for the lawsuit to be venued)

and Neufeld v. Neufeld, 910 F. Supp. 977 (S.D.N.Y. 1996) (noting that it is sufficient that a

substantial part of the events occurred in the District even if a greater part of the events occurred

elsewhere).

Here, there is ample basis for venue in Michigan. Not only did the underlying loss

allegedly occur in Michigan, but the policies at issue were delivered there as well. See generally

2 Couch on Insurance § 24:8 (observing that in a number of cases, one of the elements in

determining the place of contract, for the purpose of determining what law should govern, is the

place of delivery). Thus, Michigan is an appropriate forum for resolution of the coverage issues

presented.

II. GOULD IS REQUIRED TO PLEAD ITS CLAIMS AS COMPULSORY

COUNTERCLAIMS IN THE MICHIGAN SUIT RATHER THAN BRINGING A
SEPARATE ACTION IN ANOTHER FORUM.

A separate and alternative basis for granting Century’s motion is Gould’s failure to assert

its claims as counterclaims in the Michigan action. Rule 13(a) of the Federal Rules of Civil

Procedure mandates that if a claim arises out of the transaction or occurrence that is the subject

matter of an opposing party’s complaint and doesn’t require for adjudication the presence of

third parties over whom the court cannot acquire jurisdiction, the claim must be made as a

counterclaim. As noted by the U.S. Supreme Court, this rule is designed “to achieve resolution

in a single lawsuit of all disputes arising out of common matters.” Southern Const. Co. v.

Pickard, 371 U.S. 57, 60, 83 S.Ct. 108, 9 L.Ed.2d 31 (1962). “It requires a party to assert all

compulsory counterclaims it has against an opposing party and bars the initiation of a second suit

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based upon such a counterclaim.” Zelenkofske Axelrod Consulting, L.L.C. v. Stevenson, 1999

WL 592399, *1 (E.D. Pa) (Serlin Aff., Ex. E).6

Gould’s claims asserted in the case at bar are compulsory counterclaims in the prior

Michigan case. “‘[A] counterclaim is compulsory if it bears a logical relationship to an opposing

party’s claim’ such that separate trials on each party’s claim ‘would involve a substantial

duplication of effort.’” Id. at *2 (citing Savarese v. Agriss, 883 F.2d 1194, 1208 (3d Cir. 1989)).

Claims are logically related if “they involve ‘(1) many of the same factual issues; (2) the same

factual and legal issues; or (3) offshoots of the same basic controversy between parties.’” Id.

(citing XEROX Corp. v. SCM Corp., 576 F.2d 1057, 1059 (3d Cir. 1978)). Gould’s core claims

involve the same basic issue as in the Michigan action of whether coverage is required under the

INA policies for the underlying bodily injury claim of Mr. McCarthy, and are premised upon

many of the same factual issues (such as whether various defenses to coverage apply).

Moreover, Gould’s additional claims of bad faith and breach of fiduciary duty against Century

and INA are merely offshoots of the same basic coverage controversy between the parties, as

they obviously would not arise but for Century’s alleged failure to defend and indemnify Gould.

Thus, Gould’s claims are compulsory counterclaims to the declaratory judgment action brought

by Century in Michigan.

Further, there is no third party required for Gould’s counterclaim over which the

Michigan court would not have jurisdiction. The only legal entity that Gould has named as a

defendant in the present case in Pennsylvania that is not already a party in the Michigan action is

INA. INA is an insurance company engaged in the business of selling insurance in all 50 states.

6
It has been noted that the “first-filed rule” is potentially broader than Rule 13(a). Thus, when Rule 13(a) is
violated, the first-filed rule will generally be implicated. Id. at *2, fn.1. “Where a counterclaim which satisfies the
test for ‘logical relationship’ to an opposing party’s pending claim is separately asserted, there will almost invariably
be two actions involving the same parties and issues within the ambit of the first-filed rule.” Id.

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As such, INA clearly is subject to personal jurisdiction in Michigan.7 Consequently, Gould

should be barred for asserting its compulsory counterclaims in the Michigan case as independent

claims here.

III. IF THIS CASE IS NOT DISMISSED OR STAYED, IT SHOULD BE

TRANSFERRED IN FAVOR OF THE MICHIGAN CASE.

It should be unnecessary for this Court to consider transferring the present case since

there are sufficient grounds to enjoin it from proceeding altogether. If, however, the Court does

not dismiss or stay this case on the basis of the “first-filed rule” or the compulsory counterclaim

rule, the Pennsylvania case should be transferred to the Michigan court for consolidation with

that action, or other appropriate disposition.

It has been noted that when considering whether to transfer venue of a case pursuant to

28 U.S.C. § 1404(a), “courts weigh the various private and public interests favoring proceeding

in each forum.” Id. at *4. The private interests include “plaintiff’s choice of forum, the

defendant’s preference, whether the claim arose elsewhere, the convenience of the parties as

indicated by their relative physical and financial condition, the convenience of witnesses who

may be unavailable for trial in one of the fora and the location of pertinent books and records to

the extent they could not be produced in the alternative forum.” Id. (citing Jumara v. State

Farm Ins. Co., 55 F.3d 873, 879 (3d Cir. 1995)). The public interests include “the enforcibility

of a judgment, practical considerations that could make the trial easier, more expeditious or less

inexpensive (sic),8 the relative administrative difficulty in the two fora resulting from court

congestion, the local interest in deciding local controversies at home, the public policies of the

7
Although INA would not dispute that it is subject to personal jurisdiction in Michigan, INA denies that there is any
basis for a claim against it by Gould since Century has properly succeeded to INA’s liabilities under the policies at
issue.
8
The obviously intended phrase is “less expensive,” rather than “less inexpensive.”

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fora, and the familiarity of the trial judge with the applicable law.” Id. (citing Jumara, supra at

879-80). The factors of significance weigh in favor of a transfer of the Pennsylvania case to the

Michigan court.

In particular, although a plaintiff’s choice of forum is generally accorded substantial

weight, “the defendant’s preference logically should receive greater weight than otherwise where

he is the plaintiff in a related action covered by the first-filed rule in his forum of choice.” Id.

Such is the case with Century here. “Also, the existence of a prior related action in the transferee

district is a strong factor weighing in favor of transfer in the interest of judicial economy.” Id.

See Schmidt v. Leader Dogs for the Blind, Inc., 544 F. Supp. 42, 47 (E.D. Pa. 1982) (§ 1404(a)

authorizes transfer of case even if only to enable its consolidation with related case pending in

transferee court).

Moreover, there is no substantial difference between the two competing courts with

respect to other potentially relevant factors, such as witness convenience or the convenience of

the parties. Gould is a New York corporation. As such, Michigan should not be a significantly

more inconvenient forum for Gould than Pennsylvania, since in either case it will be litigating in

a foreign (yet not too distant) jurisdiction. Nor do any other considerations meaningfully weigh

either in favor of Pennsylvania or against Michigan as the preferred forum. In sum, an

appropriate alternative remedy available to this Court is to transfer this matter to the Michigan

court for consolidation or other disposition.

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CONCLUSION

For all of the foregoing reasons, Century requests that this Court either dismiss, stay or

transfer the case at bar in favor of the properly first-filed case pending in the District Court for

the Western District of Michigan.

Respectfully submitted,

_________________________________
Lawrence A. Serlin
Siegal & Napierkowski
220 Lake Drive East, Suite 304
Cherry Hill, NJ 08002
Tel.: (856) 667-2080
Fax: (856) 667-2210

Counsel for Defendants Century Indemnity

Company and Insurance Company of North
America

Dated: December 4, 2003

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