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New Mexico Compilation
Commission, Santa Fe, NM
'00'04- 15:09:02 2011.04.26
IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO
Opinion Number: 2011-NMCA-004
Filing Date: November 23, 2010
Docket No. 29,280
MONTY GALLEGOS,
Plaintiff-Appellant,
v.
NEVADA GENERAL INSURANCE COMPANY,
Defendant/Cross-Claimant-Appellee.
APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY
Geraldine E. Rivera, District Judge
Law Offices of Geoffrey R. Romero
Geoffrey R. Romero
Albuquerque, NM
Garcia & Vargas, LLC
Ray M. Vargas, II
Santa Fe, NM
for Appellant
Rugge, Rosales & Associates, P.C.
Dale R. Rugge
James Douglas Green
Albuquerque, NM
for Appellee
OPINION
BUSTAMANTE, Judge.
{1} This case requires us to consider the extent to which an assertedly injured third- party
claimant may participate in a declaratory judgment action brought by an automobile
1
insurance company against its insured seeking to deny coverage under its policy. We
conclude that third-party claimants are necessary parties to such declaratory judgment
actions. The district court having ruled otherwise, we reverse.
I. BACKGROUND
{2} The historical facts out of which this case arises are simple. Monty Gallegos
(Plaintiff) and Michelle Lucero (Defendant) were involved in an automobile collision.
Defendant was driving a car insured by Appellee Nevada General Insurance Company
(Nevada General). Nevada General paid for damage to Plaintiff’s vehicle, but the parties
could not agree on medical expenses. Plaintiff sued for personal injury, naming both
Defendant and Nevada General.
{3} The procedural issues which ensued are more complex. After the suit was filed,
Defendant could not be found. Nevada General answered the complaint, but argued that
Plaintiff had failed to join a necessary party (presumably Defendant). Plaintiff then requested
leave to serve Defendant by publication; Nevada General opposed. The district court
authorized service by publication. Notice was published, and Defendant did not respond.
Although Nevada General argued against default, the district court entered an order on
December 4, 2007, awarding default judgment against Defendant. The same order
bifurcated the proceedings, separating the trial on Defendant’s liability from the fight over
who would pay the judgment (if any). The issue of payment was “stayed until further order
by the Court.” The trial on liability proceeded to an evidentiary hearing on June 17, 2008,
and on July 21, 2008, the court entered judgment against Defendant for $20,564.55.
{4} On June 20, 2008, shortly after the evidentiary hearing but before judgment had been
entered, Nevada General filed a cross-claim for declaratory judgment. In it, Nevada General
argued that because Defendant could not be found, she had violated the conditions of her
policy requiring her to help prepare a defense. Because of this, Nevada General argued that
it had no duty to defend or indemnify Defendant. Plaintiff was not made a party to the
declaratory judgment action.
{5} Plaintiff filed an answer to the cross-claim on July 29, 2008, eight days after default
judgment had been entered against Defendant. In response, Nevada General filed a motion
to strike the entire answer, arguing that because Plaintiff was not a party to the cross-claim,
the filing was immaterial. Plaintiff countered that because he had secured a judgment
against Defendant, he had standing to assert the judgment against Nevada General, and
should therefore be permitted to answer the declaratory action. The district court granted
the motion to strike. Defendant never answered the cross-claim, and Nevada General
obtained a default judgment declaring that it was not required to defend or indemnify
Defendant.
II. DISCUSSION
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{6} On appeal, Plaintiff contests both the order striking his answer to the cross-claim and
the order granting default judgment as to the cross-claim. The narrow issue before us is
whether the district court abused its discretion in striking Plaintiff’s answer. More broadly,
the issue is whether an injured third party may participate in an action brought under the
Declaratory Judgment Act (DJA), NMSA 1978, Sections 44-6-1 to -15 (1975), by an
automobile insurer to deny coverage to its insured. Because we hold that existing claimants
must be joined in an insurer’s declaratory action to deny coverage, it follows that the district
court’s decision to strike Plaintiff’s answer was error.
{7} Insurers commonly use declaratory judgments against their insureds to determine the
extent of coverage. Frequently such suits are filed as stand-alone actions rather than cross-
claims. See, e.g., Home Fire & Marine Ins. Co. v. Schultz, 80 N.M. 517, 518, 458 P.2d 592,
593 (1969). Sometimes injured third parties are not even aware of the proceedings. See,
e.g., In re Estate of Heintzelman v. Air Experts, Inc., 126 Ohio St. 3d 138, 2010-Ohio-3264,
931 N.E.2d 548, at ¶ 5. Occasionally, insurers have even gone so far as to advise the insured
not to appear in the declaratory actions. Id. We examine which parties are necessary in a
declaratory action against this background, discussing first the requirements of the DJA, and
second the effect of default declaratory judgments on parties who were not joined.
A. The Declaratory Judgment Act
{8} Plaintiff argues that the district court abused its discretion by striking his response
to Nevada General’s cross-claim against Defendant and granting a default declaratory
judgment that Nevada General was not required to defend or indemnify its insured. We
review the district court’s decision to grant a motion to strike for abuse of discretion. See
Gonzales v. Lopez, 2002-NMCA-086, ¶ 6, 132 N.M. 558, 52 P.3d 418. A trial court abuses
its discretion when it exercises its discretion based on a misunderstanding of the law. State
v. Barr, 2009-NMSC-024, ¶ 29, 146 N.M. 301, 210 P.3d 198.
{9} The DJA provides a cause of action in cases of actual controversy to declare rights,
status, and other legal relations. See § 44-6-2. Declaratory judgment allows a party “to
settle and to afford relief from uncertainty and insecurity with respect to rights, status and
other legal relations.” Section 44-6-14. However, “[w]hen declaratory relief is sought, all
persons shall be made parties who have or claim any interest which would be affected by the
declaration, and no declaration shall prejudice the rights of persons not parties to the
proceeding.” Section 44-6-12. This means that “any person or entity with an existing or
potential interest in the outcome of the action” must be named; failure to do so deprives the
court of subject matter jurisdiction. See 22A Am. Jur. 2d Declaratory Judgments § 208
(2003).
{10} The Supreme Court of New Mexico has addressed a factually similar case, reversing
a default declaratory judgment obtained by an insurer against its absent insured. In Schultz,
a driver brought a personal injury suit against an insured party who had allegedly collided
with her. 80 N.M. at 518, 458 P.2d at 593. The insured gave a statement to his insurer, but
then disappeared. Id. The insurer then initiated a separate declaratory judgment action
against both the driver and the insured seeking a declaration that the defendant “had
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breached the cooperation clause of the policy in failing to appear, assist and cooperate with
the insurer in the defense of the action.” Id. As the defendant was unavailable, the Court
entered a default declaratory judgment for the insurer. Id.
{11} The driver appealed, arguing that the insured, who had not been served with process,
was an indispensable party to the declaratory judgment action. Id. The Supreme Court
agreed. Under NMSA 1953, Section 21-1-1(19)(B) (1969) (now Rule 1-019(B) NMRA,
identical in its essentials), an indispensable party was “one whose interests will necessarily
be affected by a judgment in a particular case.” Schultz, 80 N.M. at 518, 458 P.2d 593. The
Court reasoned that victory by the insurer in the declaratory action would deprive the insured
of his right to be defended and would expose him “to the consequences of a judgment in the
personal injury action even though the insurance company had contracted to indemnify him.”
Id. at 519, 458 P.2d at 594. The Court concluded that since the insured’s interests were
necessarily affected by the declaratory judgment action, he was an indispensable party, and
reversed with instructions to dismiss the declaratory action. Id.
{12} Although Plaintiff has not argued that he was an indispensable party to Nevada
General’s cross-claim, Schultz is nevertheless instructive. In both Schultz and the instant
case, the insurer sought declaratory judgment against its absent insured to avoid liability.
The insured’s interest in Schultz was, in part, whether the insurer would pay any judgment
against him. Here, Plaintiff’s interest is whether Nevada General will pay the judgment he
has already obtained against its insured. Like the insured in Schultz, Plaintiff’s interests
would “necessarily be affected” by a declaration of non-coverage (assuming he was allowed
to participate in the declaratory action). Id. Accordingly, like the insured in Schultz,
Plaintiff here was an indispensable party under Rule 1-019. We conclude that this also
makes him a required party under the DJA, which states that “[w]hen declaratory relief is
sought, all persons shall be made parties” who have any interest which would be affected.
Section 44-6-12 (emphasis added).
{13} The policies underlying New Mexico’s Mandatory Financial Responsibility Act
(MFRA), NMSA 1978, Sections 66-6-201 to -239 (1978, as amended through 2003), provide
additional support to the argument that Plaintiff was a required party under Section 44-6-12
of the DJA. The MFRA “has its own strong public policy and judicial precedent that affords
third-party claimants a special, if not unique, place in our jurisprudence.” Hovet v. Allstate
Ins. Co., 2004-NMSC-010, ¶ 24, 135 N.M. 397, 89 P.3d 69. Unlike indemnification
insurance, which simply protects the owner of the vehicle from loss, compulsory liability
insurance “is intended to provide a benefit to the general public.” Raskob v. Sanchez, 1998-
NMSC-045, ¶ 6, 126 N.M. 394, 970 P.2d 580. Requiring insurers to join third-party
claimants in declaratory actions is consistent with the unique status conferred upon the
driving public by Raskob and its progeny.
{14} Additionally, our decision is consistent with the majority of state and federal courts
that have considered the issue. The DJA is construed “to effectuate its general purpose to
make uniform the law of those states which enact it.” Section 44-6-15. The United States
Supreme Court has held that an injured party cannot avoid being made a party to an insurer’s
declaratory action against the insured for non-coverage. See Md. Cas. Co. v. Pac. Coal &
Oil Co., 312 U.S. 270, 274 (1941). The Ninth Circuit recently held that “[a] default entered
4
against an insured policyholder . . . should not prevent an injured third party . . . from
proceeding on its own behalf” in a declaratory action by the insurer. Westchester Fire Ins.
Co. v. Mendez, 585 F.3d 1183, 1189 (9th Cir. 2009). It noted that the third party’s interest
is obvious: “it wants to be able to collect its judgment . . . from the [insurer’s] insurance
policy and it cannot do that if [the insurer] is not liable under that policy.” Id. at 1188. The
court also noted that “[i]t has long been established that, where there are several defendants,
the transgressions of one defaulting party should not ordinarily lead to the entry of . . . a
judgment fatal to the interests of other parties,” id. at 1189, and that the argument for
allowing a third party to proceed is “especially powerful in the context of third-party liability
insurance, where the insured may lose interest and the injured party has the primary
motivation to pursue the claim.” Id.
{15} Most (if not all) courts to address the issue have found that injured third parties are
proper participants in declaratory actions brought by insurers to deny coverage. See, e.g.,
Hawkeye-Sec. Ins. Co. v. Schulte, 302 F.2d 174, 177 (7th Cir. 1962) (holding that an injured
third party has a right to participate in insurer’s declaratory action); Standard Accident Ins.
Co. v. Meadows, 125 F.2d 422, 423-24 (5th Cir. 1942) (“It has been repeatedly held in this
circuit and elsewhere that whether an insurer is bound [under] an automobile insurance
policy by a judgment against its insured, presents a controversy for declaratory judgment as
between it, its insured and the plaintiff.”); Allstate Ins. Co. v. Hayes, 499 N.W.2d 743, 748
(Mich. 1993) (“[An] injured party in an insurer’s action for declaratory judgment is a proper
party to that action.”).
{16} In addition, some courts have gone so far as to hold injured parties indispensable.
See Fed. Kemper Ins. Co. v. Rauscher, 807 F.2d 345, 354-55 (3d Cir. 1986) (noting that
injured third parties were indispensable in declaratory actions by insurers against insureds
and holding that insured’s default did not prevent injured third party from defending in the
declaratory action); In re Estate of Heintzelman, 126 Ohio St. 3d 138, 2010-Ohio-3264, 931
N.E.2d 548, at ¶ 20 (“[A] plaintiff with a claim against an insured would seem to be a
necessary party in a declaratory judgment action in which the insurer denies coverage.”).
{17} After deciding Kemper, the Third Circuit has reached different results in similar
cases. In Liberty Mutual Insurance Co. v. Treesdale, Inc., 419 F.3d 216, 219 (3d Cir. 2005),
the court affirmed the district court’s ruling denying various injured third parties leave to
intervene in an insurer’s declaratory action against an asbestos manufacturer. In deciding
Treesdale, the court did not refer to Kemper. Instead, it relied on Third Circuit cases holding
that a mere economic interest is insufficient to allow intervention. Id. at 221-25. Here, in
the context of New Mexico’s compulsory automobile insurance regime, we find the
reasoning of Treesdale unpersuasive. Furthermore, unlike the court in Treesdale, which
ignored contrary law regarding Pennsylvania’s Declaratory Judgment Act, we interpret our
DJA to make it harmonious with those of other states. Subsequently, at least one district
court in the Third Circuit has recognized the tension between Kemper and Treesdale.
Nationwide Mut. Ins. Co. v. Garman, 2010 WL 2038575 (M.D. Pa. May 19, 2010).
Although it ultimately chose to follow Treesdale, it did so with little meaningful analysis and
does not help us here. In any event, both of these cases framed the issue in terms of the
Federal Rules of Civil Procedure, an issue we do not confront today except by analogy.
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{18} We recognize that our Supreme Court’s opinion in Schultz did not explicitly hold that
a person such as Plaintiff was a required party to the declaratory action. Today, consistent
with both Schultz and the well-reasoned state and federal cases that have addressed this
issue, we hold that when an automobile insurer brings a declaratory action to deny coverage,
both the insured and the existing plaintiffs against the insured are required parties.
Accordingly, the district court abused its discretion by not allowing Plaintiff to participate
in the declaratory action.
B. The Doctrine of Law of the Case
{19} Our conclusion that Plaintiff should have been allowed to participate is bolstered by
the fact that a default judgment under these circumstances would not bind him. The effect
of a declaratory judgment to which Plaintiff was not joined can be analyzed under the DJA
or under the principles of preclusion. Under either of these approaches, Plaintiff could
litigate the issue again in his own claim against Nevada General.
{20} Because the declaratory action here is in the same proceeding as the liability case,
we apply the doctrine of the law of the case rather than the doctrine of issue preclusion. See
Alba v. Hayden, 2010-NMCA-037, ¶¶ 6-7, 148 N.M. 465, 237 P.3d 767. The doctrine of law
of the case relates to litigation of the same issue recurring within the same suit. Id. ¶ 7. Its
purpose is to ensure that once a particular issue in a case is settled it remains settled. Id. ¶
8. In Alba, the question was whether a defendant was bound by summary judgment against
a co-defendant. Id. ¶ 1. The summary judgment was premised upon matters that had been
deemed admitted because the co-defendant had not responded to them. Id. ¶ 3. Because
under existing law one defendant could not be bound by the deemed admissions of a co-
defendant, this Court concluded that a defendant could not be bound by summary judgment
against a co-defendant premised upon deemed admissions. Id. ¶ 13.
{21} A similar result obtains here. The DJA forbids a party from being prejudiced by a
declaratory action to which he was not a party. Section 42-6-12. Following the reasoning
of Alba, we conclude that a default declaratory judgment against only Defendant would not
become the law of the case with respect to Plaintiff. It follows that, were we to affirm the
district court, Plaintiff would be free to litigate the coverage issue again in the non-liability
portion of his case. Such a result is contrary to the purposes of both the doctrines of
preclusion, see Alba, 2010-NMCA-037, ¶ 6 (“The principles of preclusion operate to . . .
reliev[e] parties of the burdens of multiple lawsuits . . . and prevent[] inconsistent decisions.”
(internal quotation marks and citation omitted)), and the DJA, see Hayes, 499 N.W.2d at 747
(“[T]he purpose of the [DJA] is to allow parties to avoid multiple litigation. . . .”).
{22] Indeed, our Supreme Court in Schultz took it for granted that non-parties would not
be bound by declaratory judgments. See 80 N.M. at 518-19, 458 P.2d at 593-94. Similarly,
the Court in Maryland Casualty Company, recognizing that declaratory judgment against
only the insured would not bind the injured party, required joinder of the injured third-party
to avoid the possibility that “opposite interpretations of the [insurance] policy might be
announced” in the declaratory action and the liability action. 312 U.S. at 274; see also
Hayes, 499 N.W.2d at 743, 751 (holding that a default declaration of non-coverage against
6
insured does not bind third parties); El Naggar Fine Arts Furniture, Inc. v. Indian Harbor
Ins. Co., 248 S.W.3d 202, 207 (Tex. App. 2007) (“[A]n injured third party . . . should not be
bound by a declaration obtained by an insurer against a defaulting insured in an action in
which the injured third party is not named.”).
{23} Requiring insurers to join injured parties in declaratory judgment actions comports
with the policies behind both the DJA and the principles of preclusion. This, together with
our conclusion that plaintiffs as well as insureds are required parties in declaratory actions
to deny coverage by insurers, convinces us that the district court erred in denying Plaintiff
an opportunity to contest the coverage issue below.
III. CONCLUSION
{24} For the foregoing reasons, we reverse the order granting the motion to strike
Plaintiff’s answer to cross-claim and remand to the district court with instructions to vacate
the default judgment in the declaratory action.
{25} IT IS SO ORDERED.
____________________________________
MICHAEL D. BUSTAMANTE, Judge
WE CONCUR:
____________________________________
RODERICK T. KENNEDY, Judge
____________________________________
MICHAEL E. VIGIL, Judge
Topic Index for Gallegos v. Nevada Gen. Ins. Co., Docket No. 29,280
AE APPEAL AND ERROR
AE-LC Law of the Case
CP CIVIL PROCEDURE
CP-CR Cross-claims
CP-DJ Default Judgment
CP-FA Failure to Appear
CP-ID Indispensable Parties
CP-JC Joinder of Claims
CP-JP Joinder of Parties
CP- LC Law of the Case
CP- TA Third-party Actions
CP-SP Service of Process
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IN INSURANCE
IN-DC Denial of Coverage
IN-DD Duty to Defend
IN-MV Motor Vehicle Insurance
JM JUDGMENT
JM-DJ Declaratory Judgment
8