Case Name: EVANS PRODUCTS CO. and Home Builders Mortgage Corp., Appellees, v. WEST AMERICAN INSURANCE CO., Appellant
Court: United States Court of Appeals for the Third Circuit
Jurisdiction: United States
Decision Date: 1984-06-18
Citations: 736 F.2d 920
Docket Number: No. 83-1374
Parties: EVANS PRODUCTS CO. and Home Builders Mortgage Corp., Appellees, v. WEST AMERICAN INSURANCE CO., Appellant.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 736
Pages: 920–929

Head Matter:
EVANS PRODUCTS CO. and Home Builders Mortgage Corp., Appellees, v. WEST AMERICAN INSURANCE CO., Appellant.
No. 83-1374.
United States Court of Appeals, Third Circuit.
Argued Feb. 28, 1984.
Decided June 18, 1984.
Michael P. McKenna (argued), Margolis, Edelstein, Scherlis, Sar'owitz & Kraemer, Philadelphia, Pa., for appellant.
Alan Jay Josel (argued), Menin, Flick & Josel, Norristown, Pa., for appellee.
Before ADAMS and SLOVITER, Circuit Judges, and TEITELBAUM, District Judge.
The Honorable Hubert I. Teitelbaum, Chief Judge, United States District Court for the Western District of Pennsylvania, sitting by designation.

Opinion:
OPINION OF THE COURT
TEITELBAUM, Chief Judge.
I
This is an appeal from a judgment entered for Evans Products Co. and Home Builders Mortgage Corp. (Evans) and against West American Insurance Co. (West) in an action on an insurance contract. For the reasons set forth below, we vacate and remand for further proceedings.
II
Steven and Patricia Brooks had obtained a homeowners' insurance policy from West with a loss-payable clause in favor of Evans as mortgagee. The policy provided fire-loss coverage on the dwelling in the maximum- amount of $43,000, on personal property in the maximum amount of $21,-500, and on loss of use in the maximum amount of $5,600.
A fire subsequently occurred at the Brooks' residence on May 20, 1980. The Brooks' proof of loss statement, claiming $64,500 for total loss of the dwelling and damage to personal property, was rejected by West. An Action in Assumpsit against West subsequently was brought by the Brooks in the Court of Common Pleas of Westmoreland County, Pennsylvania on December 30, 1980. In this action, the Brooks sought recovery for both the real and personal property losses.
Evans then executed and returned a proof of loss statement to West on August 4, 1981. Evans' statement, claiming $43,-000 for total loss of the dwelling, also was rejected, whereupon it brought a diversity action in federal district court on December 15, 1981 seeking to recover under the loss-payable clause of the insurance policy.
On October 14, 1982, while a decision on the merits of the action in federal court was pending, West settled the Brooks' state court action and paid them $7,000 for loss of personal property only. Evans and West subsequently submitted the action below for resolution of the case stated without a jury on the basis of stipulated facts and accompanying memoranda of law. Judgment was entered for Evans.
Ill
Evans initially sought to recover in the complaint on the theory that it had complied with all conditions precedent to recovery. West denied in its answer that Evans had complied with all conditions precedent to recovery and defended on the theory that Evans' suit was barred for failure to comply with a provision in the insurance contract that any action against West be brought within one year.
Evans subsequently revised its theory of recovery in its memorandum of law submitted for resolution of the case stated. It contended that it was entitled to recover under the loss-payable clause, despite its failure to bring suit within the required period of time. Specifically, Evans sought recovery on the theory that, under Pennsylvania law, a claimant failing to comply with all the conditions of the policy is barred from recovering only upon a showing by the insurer that it had been prejudiced by the failure to comply. Evans maintained that no such showing of prejudice had been made by West.
West also revised the theory on which it defended in its memorandum of law submitted for resolution of the case stated. West maintained therein that the Pennsylvania Supreme Court had rejected the theory put forth by Evans. An insurer, it argued, does not bear the burden, under Pennsylvania law, of showing any prejudice to itself in order to bar recovery under a policy of insurance for failure to comply with conditions set forth in the policy.
The district court ruled that the failure of Evans to comply with the requirement that action be brought within one year did not bar recovery by Evans. It held that Evans was entitled, by virtue of the loss-payable clause, to rely upon the action by the Brooks in state court as protecting its interest. West then was found in breach of that obligation to Evans when it settled with the Brooks on October 14, 1982.
The basis upon which relief was granted to Evans was an event which occurred more than seven months after West had answered the complaint — i.e., the settlement on October 14, 1982 of the Brooks' state court action against West. Evans neither amended nor supplemented its complaint to cite this particular event as providing a basis for the relief sought. West made no reference to it in its answer. Moreover, this particular event neither had been cited by Evans as providing a basis for relief nor had been opposed by West in their memoranda submitted for disposition on the merits.
The district court apparently was cognizant that the relief granted to Evans was based on a consideration not addressed by the parties. It held, however, that this did not matter because:
Plaintiff would be permitted to amend its Complaint in the present action to assert that the defendant' breached its obligations under the loss-payable endorsement by making settlement directly with the owners, without protecting plaintiff's interests.
IV
Adherence to the rigid theory-of-the-pleadings doctrine has been abolished by the Federal Rules of Civil Procedure. A court is not limited to granting relief to a party solely on the basis of theories of recovery set forth in the pleadings. For instance, Fed.R.Civ.P. 54(c) requires that the judgment entered shall grant the relief to which a party is entitled, even when such relief was not demanded in the pleadings.
Not unexpectedly, Fed.R.Civ.P. 54(c) has been used to grant relief based on theories of recovery different from those theories set forth in the pleadings. For instance, an insurance policy may be reformed in an action seeking a declaration of nonliability, Metropolitan Casualty Ins. Co. of New York v. Friedley, 79 F.Supp. 978 (N.D.Iowa 1948). Specific performance of a contract may be awarded on a claim seeking cancellation and rescission. Garland v. Garland, 165 F.2d 131 (10th Cir.1947). Recovery, based on a theory of quantum meruit or on a theory of unjust enrichment, or on the principle of contribution may be allowed in an action instituted for breach of contract. Recovery may be granted for breach of contract even though the complaint alleges only a tort. See, in general, 10 Wright, Miller and Kane, Federal Practice and Procedure § 2664 at 163169 (1983).
This does not mean, however, that there are no restrictions on the relief that may be granted under Fed.R.Civ.P. 54(c). What a court may do ultimately is limited by fundamental notions of due process and fair play. Sylvan Beach, Inc. v. Koch, 140 F.2d 852, 861-862 (8th Cir.1944). Fed.R.Civ.P. 54(c) permits relief based on a particular theory of relief only if that theory was squarely presented and litigated by the parties at some stage or other of the proceedings. Cioffe v. Morris, 676 F.2d 539, 541 (11th Cir.1981). Put another way, relief may be based on a theory of recovery only if the theory was presented in the pleadings or tried with the express or implied consent of the parties. Monod v. Futura, Inc., 415 F.2d 1170, 1174 (10th Cir.1969).
When relief is based on a theory of recovery not raised in the pleadings, the requirements of Fed.R.Civ.P. 15(b) may come into play. Cioffe, 676 F.2d at 541. Fed.R.Civ.P. 15(b) requires that unpled issues which are tried with the express or implied consent of the parties are to be treated as if they were raised in the pleadings. The court shall permit the pleadings to be amended to conform to the evidence offered when the presentation of the merits of the action will be subserved and the opposing party will not thereby be prejudiced.
The primary consideration in determining whether leave to amend under Fed. R. Civ.P. 15(b) should be granted is prejudice to the opposing party. See United States v. Hougham, 364 U.S. 310, 315, 81 S.Ct. 13, 17, 5 L.Ed.2d 8, 13 (1960). The principal test for prejudice in such situations is whether the opposing party was denied a fair opportunity to defend and to offer additional evidence on that different theory. Universe Tankships, Inc. v. U.S.A., 528 F.2d 73, 76 (3d Cir.1975); see also Cioffe, 676 F.2d at 542. The propriety of granting leave to amend under Fed.R.Civ.P. 15(b) and of granting relief under Fed.R.Civ.P. 54(c) depend on basically similar considerations.
As was pointed out, the theory of recovery on which relief was granted to Evans had not been raised by the time the pleadings had closed. The event cited as giving rise to the breach by West did not occur until more than seven months after West had answered the complaint.
It also is clear that neither party expressly raised the issue whether the settlement of • the state court action between the Brooks and West constituted a breach of an obligation West owed to Evans by virtue of the loss-payable endorsement. This matter evidently was raised sua sponte by the district court.
As was pointed out previously, judgment was entered on the basis of stipulated facts submitted by the parties. One such stipulated fact was the settlement agreement between the Brooks and West on October 14, 1982. This particular stipulation does not indicate that the parties implicitly consented to litigation of the question whether such settlement constituted a breach on the part of West. Rather, it was intended by the parties to bear only on the questions whether, under Pennsylvania law, the burden is on the insurer to show that it was prejudiced by the failure of the mortgagee to bring suit within the prescribed time period and, if it does, whether West in fact had been prejudiced.
The theory on which relief was granted to Evans had neither been raised in any of the pleadings nor been litigated with either the express or implicit consent of the parties. West therefore was denied a fair opportunity to defend against the theory that it had breached its obligation to Evans by virtue of the settlement with the Brooks on October 14, 1982. The relief granted by the district court thus was improperly granted because the theory upon which it was based had not been squarely presented and litigated at any stage of the proceedings and because West thereby had been prejudiced. See Cioffe, 676 F.2d at 541.
As was pointed out, the district court may, under Fed.R.Civ.P. 15(b), permit amendments to conform to the evidence only if an issue has been tried with the express or implied consent of the parties and the opposing party will not thereby be prejudiced. Because the issue in question had not been tried with the express or implied consent of the parties and West thereby was prejudiced, amendment under Fed.R.Civ.P. 15(b) would be improper.
This case is remanded to permit the district court to consider allowing Evans to amend its complaint. If, however, the district court does permit Evans to amend its complaint to include the above claim for breach, West then may answer and shall have fair opportunity to defend against that theory and to present further evidence in its defense.
. The clause in question reads as follows:
12. Mortgage Clause.
The word "mortgagee" includes trustee.
If a mortgagee is named in this policy, any' loss payable under Coverage A or B shall be paid to the mortgagee and you, as interests appear. If more than one mortgagee is named, the order of payment shall be the same as the order of precedence of the mortgages.
If we deny your claim, that denial shall not apply to a valid claim of the mortgagee, if the mortgagee:
a. notifies us of any change in ownership, occupancy or substantial change in risk of which the mortgagee is aware:
b. pays any premium due under this policy on demand if you have neglected to pay the premium;
c. submits a signed, sworn statement of loss 60 days after receiving notice from us of your failure to do so. Policy conditions relating to Appraisal, Suit Against Us and Loss Payment apply to the mortgagee. If the policy is cancelled by us, the mortgagee shall be notified at least 10 days before the date cancellation takes effect.
If we pay the mortgagee for any loss and deny payment to you:
a. we are subrogated to all the rights of the mortgagee granted under the mortgage on the property; or
b. at our option, we may pay to the mortgagee the whole principal on the mortgage plus any accrued interest. In this event, we shall receive a full assignment and transfer of the mortgage and all securities held as collateral to the mortgage debt.
Subrogation shall not impair the right of the mortgagee to recover the full amount of the mortgagee's claim.
. The provision in question reads as follows:
8. Suit Against Us. No action shall be brought unless there has been compliance with the policy provisions and the action is started within one year after the occurrence causing loss or damage.
. First National Bank of Hollywood v. American Foam Rubber Corp., 530 F.2d 450, 453 n. 3 (2d Cir.1976).
. Matarese v. Moore-McCormack Lines, Inc., 158 F.2d 631 (2d Cir.1946).
. Spaulding v. Parry Navigation Co., 90 F.Supp. 567 (S.D.N.Y.1950), rev'd on other grounds, 187 F.2d 257 (2d Cir.1951).
. Thomas v. Pick Hotels Corp., 224 F.2d 664, 666 (10th Cir.1955).