Court Opinion

ID: 9487658
Source: CourtListenerOpinion
Date Created: 2023-08-05 12:23:23.033174+00
Date Added: 2024-06-11T17:52:25.238911
License: Public Domain

ROSENN, Circuit Judge,
dissenting.
Many persons who charged that T & N was the alter ego of its subsidiary, Keasbey and Mattison Company (Keasbey), and therefore responsible for bodily injuries they sustained due to asbestos exposure, sued T & N. T & N thereupon filed a declaratory judgment action against American Mutual in the United States District Court for the District of Columbia. T & N’s claim arose out of a policy naming Keasbey as the insured, although Keasbey had dissolved in 1967 (Maj. Op. at 176) and American Mutual had written its last policy to Keasbey in 1965. The court found that T & N was an additional insured under the policy and directed the parties to attempt to reach a settlement. They did, and American Mutual agreed to pay T & N a significant sum of money, more than half of which has been paid.
The settlement agreement explicitly provided that American Mutual, upon the execution of the agreement, would not only have no further obligations “based upon, arising out of or related to any policy of insurance issued to Keasbey by American Mutual,” but that all such policies shall be considered “exhausted, null and void and of no further force or effect.” I cannot agree, therefore, that the plain language of that agreement, solemnly executed in settlement of then pending litigation in court, can be ignored. The settlement agreement constitutes a substituted contract, and, therefore, whether it initially had its genesis in the policies written by American Mutual can leave no lingering liability arising under those insurance policies. I therefore respectfully dissent.
I.
I agree with the district court and the majority here that Keasbey’s residence is irrelevant and that T & N is not a resident of Pennsylvania. (Maj.Op. at 177-78). The majority, however, concludes that the lack of residency does not bar T & N from recovery because the Act does not limit recovery to persons, and permits recovery with respect to property permanently located in Pennsylvania. Without any discussion at this point of the effect of the settlement agreement on any claim of T & N against American Mutual, the majority decides that if T & N’s claim may be “properly characterized as arising out of a loss or liability to the property itself,” the district court may find that PIGA is hable if the tort claimant is a Pennsylvania resident.
The majority appears to rationalize that if the original tort claimant was a permanent Pennsylvania resident who would have had a claim against T & N arising out of the asbestos condition of the resident’s property, that in itself would suffice to permit T & N to recover, regardless of the settlement agreement between T & N and American Mutual. The majority offers no explanation and advances no reasons for disregarding the specific language of the settlement agreement which plainly states that (a) no rights or benefits were conferred upon any person except the parties to the agreement, and (b) all policies of insurance issued to Keasbey and all obligations arising out of or related to any policy of insurance to Keasbey by American Mutual were “exhausted, null and void and of no further force and effect” upon execution of the agreement.
The result of the majority’s expansive rationalization is to make the tort claimants the fundament of T & N’s claim and the springboard for purposes of T & N recovery; it completely obliterates the settlement agreement. Stated another way, the majority has turned back the clock sometime prior to the execution of the settlement agreement and treats the agreement as if it never existed.
II.
A federal district court exercising diversity jurisdiction must apply the choice of law rules of the forum state. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 497, 61 S.Ct. 1020, 1022, 85 L.Ed. 1477 (1941); American Air Filter Co. v. McNichol, 527 *186F.2d 1297, 1299 n. 4 (3d Cir.1975). Accordingly, we must apply Pennsylvania choice of law rules in this case.
Pennsylvania courts generally honor the intent of the contracting parties and enforce a choice of law provision in a contract. Smith v. Commonwealth Nat. Bank, 384 Pa.Super. 65, 557 A.2d 775, 777 (1989), appeal denied, 524 Pa. 610, 569 A.2d 1369 (1990). The Pennsylvania courts have adopted section 187 of the Restatement (Second) Conflict of Laws which provides that:
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
See e.g., Schifano v. Schifano, 324 Pa.Super. 281, 471 A.2d 839, 843 n. 5 (1984). The settlement agreement contains a choice of law provision which provides “[t]his agreement shall be governed by the substantive law of the State of New York.” Therefore, this court should apply New York substantive law to determine the character of the agreement.
A substituted contract is a novation and “[a]n existing claim can be instantly discharged by the substitution of a new executo-ry agreement in its place.” 6 Corbin on Contracts, § 1293 (West. Pub. Co. 1962) (footnote omitted); Malanca v. Falstaff Brewing Co., 694 F.2d 182, 184 (9th Cir.1982). Novation is the “[s]ubstitution of a new contract, debt or obligation for an existing one, between the same or different parties.” Black’s Law Dictionary, 6th Ed. Cent. Ed.
Under New York law,1 we are faced here with a classic novation and any suits by T & N must be based on the settlement agreement rather than the earlier insurance policies. In Health-Chem Corp. v. Baker, 915 F.2d 805 (2d Cir.1990), Health Chem Corp. sought a declaration that the settlement agreement negotiated with a former director was invalid and required renegotiation. The court of appeals, applying New York law, affirmed the district court’s rejection of the corporation’s complaint, and held that “[w]hen the parties to a contract enter into a new agreement that expressly supersedes the previous agreement, the previous agreement is extinguished, thereby reducing the remedy for breach to a suit on the new agreement.” Id. at 811; Wigton v. Rosenthall, 747 F.Supp. 247 (S.D.N.Y.1990); Flaum v. Birnbaum, 120 A.D.2d 183, 508 N.Y.S.2d 115 (N.Y.A.D. 4 Dept.1986).
There is a substituted contract or novation if: (1) there is a valid former contract, (2) the parties agree to a new contract, (3) the parties form a valid new contract, and (4) the parties intend to extinguish the old contract. Flaum v. Birnbaum, 120 A.D.2d 183, 508 N.Y.S.2d 115. In this case, all the elements of a novation are met: (1) there was a valid insurance contract, (2) the parties agreed to a new contract, the settlement agreement, (3) the agreement is a valid contract, and (4) the parties explicitly stated that the new contract extinguished the old contract upon execution of the agreement and would be of no further force and effect. The settlement agreement, therefore, extinguished any rights that T & N enjoyed under the original policy. “The substituted contract discharges the original duty and breach of the substituted contract by the obligor does not give the obligee a right to enforce the original duty.” Restatement (Second) of Contracts, § 279(2).
T & N’s argument that American Mutual’s failure to fulfill the terms of the substituted contract revives the old insurance contracts is contrary to the clear law. T & N confuses novation with an executory accord without satisfaction. Cf. Bandman v. Finn, 185 N.Y. 508, 78 N.E. 175 (C.A.N.Y.1906).
It is the essence of an accord that the original duty is not satisfied until the accord is performed, a result that is sometimes suggested by use of the term “execu-tory accord.”
*187Restatement (Second) of Contracts, § 281, comment a. It thus differs from a substituted contract “under which a promise of substituted performance is accepted.in satisfaction of the original duty.” Id. comment e.
In National American Corp. v. Fed. Republic of Nigeria, 448 F.Supp. 622 (S.D.N.Y.1978), aff'd, 597 F.2d 314 (2d Cir.1979), the court, applying New York law, distinguished an executory accord from a substitute contract.
An executory accord is, by definition, “an agreement that an existing claim will be discharged in the future by the rendition of a substituted performance.” 6 Corbin, Contracts § 1269 at 75 (1962) (emphasis added) ... In contrast, a substitute contract operates as its name implies — as an immediate discharge and satisfaction of existing claims in return for the new contract, even though performance is to commence in the future. Should a breach later occur, the creditor is limited to his-rights under the substitute agreement.
Id. at 643 (citation omitted).
Thus, under the settlement agreement here, the old contract is dead. The subsequent agreement extinguished the old one and the remedy for any breach thereof is under the superseding agreement. See Northville Inds. Corp. v. Fori Neck Oil Terms. Corp., 100 A.D.2d 865, 474 N.Y.S.2d 122, aff'd, 64 N.Y.2d 930, 488 N.Y.S.2d 648, 477 N.E.2d 1102 (1985). Accordingly, the only remedy for a breach of the substituted contract is a suit on that contract.
III.
Therefore, in response to the questions certified by the district court, I would hold as to question 4 that it erred in holding that T & N could rely on the underlying claims resolved in the settlement agreement, and the residence of the underlying claimants to meet the residency requirement of the Act. In response to question 5, I would similarly hold that it erred in holding that T & N could rely on the claims represented in the settlement agreement and the location of property which sustained loss to meet the residency requirement of the Act. Under my view of the ease, there is no need to reach the issues raised in questions 6 and 7. I would answer the first three questions in the affirmative.

. The Restatement (Second) of Contracts, § 280, treats a novation more narrowly than does New York and defines it as a substituted contract including as a party one who was neither the obligor nor the obligee of the original duty. However, § 279 of the Restatement (Second) of Contracts provides: "A substituted contract is a contract that is itself accepted by the obligee in satisfaction of the obligor’s existing duty.”