Derivative Liability

Rule 14(a)(1) lets a defending party bring in a nonparty who “is or may be liable to it for all or part of the claim against it.”¹ The test turns on which way the money moves if the defending party loses. The plaintiff has sued the defending party, and the question is whether someone else must cover that loss, wholly or in part. A nonparty who must is derivatively liable: its debt exists only because, and only to the extent that, the defending party is held liable to the plaintiff.²

Students go wrong by borrowing the test from other joinder devices. Permissive joinder under Rule 20 asks whether claims share a transaction or occurrence and a common question, and impleader is not satisfied by that overlap.³ A nonparty may have witnessed, or even helped cause, every event in the case and still owe the defendant nothing. Such a nonparty cannot be impleaded. The four subsections below take up the theories that make a nonparty liable over, the contingency that lets impleader work before anyone has paid, the exclusion of a nonparty liable only to the plaintiff, and the requirement that substantive law supply the right.

Rule 14(a)(1) names no cause of action. It describes a relationship in which the outsider must pay only if the defending party loses to the plaintiff, and substantive law supplies the recurring theories that create that relationship: indemnity, subrogation, contribution, and breach of warranty.⁴ The rule’s words “all or part” mark the first division among them. Indemnity passes on the whole loss, and contribution passes on a share.⁵

Indemnity shifts the entire loss to someone who has agreed, or is legally obliged, to bear it. Suppose a builder agrees to indemnify an equipment manufacturer for injuries caused when the builder’s employees use the equipment. An injured worker sues the manufacturer, and the manufacturer may implead the builder, because the builder’s promise makes it answerable for whatever the worker recovers, assuming the impleader is timely and no other procedural impediment exists.⁶ An insurer fits the same pattern. If Napoleon sues Wellington over a polo injury and Lloyds of London, Wellington’s liability insurer, denies that the policy covers the claim, Wellington may implead Lloyds for indemnity against any judgment Napoleon recovers.⁷ In both examples the defendant is trying to pass on all of its liability.

Indemnity can also follow from the difference between passive and active fault. In Lehman v. Revolution Portfolio L.L.C., Lehman sued a bank in a Massachusetts state court to restrain or rescind the sale of his real estate. He alleged that Roffman had fraudulently introduced a sham investor to the bank to induce the loan, and that the bank, in accepting that investor, had failed to exercise due diligence.⁸ The FDIC, as the bank’s successor in interest, impleaded Roffman. The court held that, under Rule 14’s liberal standard, a party accused of passive negligence (here the FDIC) is entitled to implead the party who allegedly committed the active conduct (here Roffman) on a theory of indemnification.⁹

Contribution passes on only part of the loss. Suppose Napoleon sues Wellington for negligently injuring him in a polo match, and Wellington contends that Robespierre’s negligence also contributed to the injury. If Wellington proves it, the law of contribution among joint tortfeasors may entitle him to recover part of what he pays Napoleon, and Rule 14(a)(1) lets him implead Robespierre.¹⁰ The size of that share depends on the jurisdiction. Some divide the judgment equally, some follow the jury’s percentage of fault, and states that have abandoned joint and several liability allow no contribution at all.¹¹ The FDIC’s contribution count in Lehman rested on the same logic. Roffman and the bank were putative joint tortfeasors, because Roffman’s alleged fraud and the bank’s alleged negligent omissions combined to create one harm. Massachusetts law gives a right of contribution among persons jointly liable in tort for the same injury, even when they are liable under different tort theories.¹²

Subrogation lets one person stand in another’s shoes to pursue a claim. If an insured sues his insurance company to recover for injuries suffered in an auto accident, the insurer may implead the driver whose alleged negligence caused the accident.¹³ Like the other reimbursement claims, the insurer’s claim against the driver does not exist until the original claim succeeds, and impleader brings it forward anyway.¹⁴

Breach of warranty lets a defendant pass a loss back up the chain of supply. A plaintiff sues Doeing on a warranty or product-defect theory over a defective altimeter. Doeing impleads Altimeters R Us, which made the altimeter, and asserts that Altimeters R Us is liable over for all or part of whatever Doeing owes the plaintiff. Responsibility for the defective part is then allocated in one proceeding, so Doeing is not left holding the entire loss.¹⁵

The theory of the third-party claim need not match the plaintiff’s theory. A defendant sued for negligence may implead a third party to assert a contractual right of indemnity, and a defendant liable to the plaintiff in tort may hold only a contract claim against the third party.¹⁶ The injured worker in the builder example sues over an injury, while the manufacturer’s claim over rests on the builder’s promise. What must be derivative is the third party’s duty to pass on the plaintiff’s recovery, and its legal label may differ.

A familiar label is still not enough, because the question is always whether the claim passes some of the plaintiff’s recovery to the third party. The FDIC’s third count in Lehman marks the line. Besides indemnification and contribution, the FDIC sought the outstanding loan balance from Roffman on his guaranty. The FDIC’s successor in interest acknowledged that the FDIC could not have brought that count alone as a third-party claim under Rule 14(a), and argued instead that it was validly joined with the other two counts under Rule 18(a).¹⁷

The pony claim can ride along only after a proper derivative claim has brought Robespierre in. An illustration involving MacArthur and Spruance draws the same line: MacArthur may add any further claim he has against Spruance once he has asserted one claim proper under Rule 14(a)(1), but he could not have impleaded Spruance on a libel claim alone, because an independent claim does not satisfy the requirement that the third party “may be liable” for all or part of the plaintiff’s claim.¹⁸ Rule 18(a) lets a defendant who has asserted a proper impleader claim join all of its other claims against the third-party defendant as a matter of pleading, though questions of federal jurisdiction may still limit that joinder.¹⁹ A later section takes up that joinder. What unites indemnity, contribution, subrogation, and warranty is that each claim over ripens only if the defendant loses, and the next subsection explains how the rule treats that contingency.

Contingent Liability

The words “may be” in Rule 14(a)(1) let impleader operate before anyone’s liability has been decided.²² A liability is contingent when it will exist only if some later event occurs, and the reimbursement claims behind impleader are contingent in just that way. When the defendant serves the third-party complaint, its claim has not yet accrued, and the claim will never exist unless the plaintiff succeeds in the original action.²³ Impleader accepts a third party against whom the defendant’s claim has not yet accrued, and the effect is to accelerate the determination of that contingent claim into the main case.²⁴

Rule 14 accepts contingency because a rule limited to matured liability would be useless while the main case was pending. The defendant’s claim over matures only after the plaintiff has won and the defendant has paid, which comes after the main case has ended. The defendant would then be left with the second lawsuit and second factfinder that impleader exists to avoid. By reaching a nonparty who only may be liable, Rule 14 lets one proceeding resolve both the plaintiff’s claim and the defendant’s claim over, and it serves the interest in avoiding circuity of actions and reaching consistent results.²⁵

The polo illustration shows how little may be settled when the third-party complaint is served. If Napoleon does not recover from Wellington, Wellington has no right of contribution against Robespierre, and Lloyds owes Wellington no indemnity unless Wellington must pay a judgment.²⁶ Neither Robespierre nor Lloyds is yet liable to Wellington, and neither may ever be. Rule 14 still treats each as a nonparty who “may be liable.”

A court cannot order a third party to repay money that the defendant has not yet paid anyone, and the answer is the conditional judgment. Suppose France sues DeLesseps and DeLesseps impleads Said as his indemnitor. If France wins on the main claim and DeLesseps wins on the impleader claim, the judge may enter a conditional judgment ordering Said to indemnify DeLesseps only after DeLesseps pays the judgment against him.²⁷ Knell v. Feltman shows the device at work. Passengers sued Feltman after a collision, and Feltman asserted a claim over against Knell. The jury found, in answer to special interrogatories, that both Feltman’s employee and Knell were negligent and that the plaintiffs’ damages were $11,500. The court entered judgment for the plaintiffs against Feltman for $11,500 and judgment for Feltman against Knell for $5,750, contingent upon Feltman’s satisfaction of the plaintiffs’ judgment.²⁸ The conditional form lets the court decide everything that can be decided now, namely that both drivers were negligent and that Knell’s share is half, and it leaves only the payment trigger for later. It also preserves the dependence of the claim over on the main claim, because a defendant who owes the plaintiff nothing has nothing to recover from the third party.²⁹

Knell objected that the passengers had never alleged that he was a joint tortfeasor with Feltman. The court answered that the right to contribution belongs to the tortfeasor who has been forced to pay, and that its existence cannot depend on which defendants the plaintiff happened to select. If it did, the plaintiff’s whim, or a deliberate plan to fasten liability on one defendant alone, could deny that defendant contribution to which it would otherwise be entitled, and the rule would invite collusion between the plaintiff and one wrongdoer to saddle the other.³⁰

Insurance supplies the most common practical application. When an insurer denies that its policy covers a tort claim, the insured may implead the insurer under Rule 14(a)(1) and seek indemnity for any judgment the plaintiff recovers.³¹ A court asked to allow impleader balances the desire to avoid circuity of actions and obtain consistent results against any prejudice the plaintiff might suffer from added complication. There should be little occasion to deny impleader, however, because the power to order a separate trial of separate issues under Rule 42(b) is enough to prevent harm.³²

An objection that the claim is premature, because the defendant has neither lost nor paid, confuses a contingent liability with a nonexistent one. A contingent liability depends on events that have not yet happened, and a nonexistent liability would never arise whatever happened. Place the polo match in a jurisdiction that allows no contribution between joint tortfeasors. Robespierre might still be liable to Napoleon directly, but he would owe Wellington nothing, now or later, so Wellington has nothing to accelerate.³³ Impleader only accelerates claims the law already recognizes, so a defendant with no recognized right cannot implead.³⁴ The last subsection returns to that requirement.

Not Merely Liable to Plaintiff

The phrase “liable to it” in Rule 14(a)(1) fixes the direction of the nonparty’s liability. The word “it” is the defending party, so the nonparty’s debt must run to the defendant and must arise because the defendant may owe the plaintiff.³⁸ A nonparty who would owe something only to the plaintiff does not qualify, however plainly it may have caused the harm. Courts draw the line the same way: Rule 14 reaches a third-party defendant who is liable to the defendant “derivatively or secondarily,” and not one who is liable solely to the plaintiff, and the usual bases are contribution and indemnity.³⁹

The hypothetical applies the rule that a defendant sued for negligence cannot implead a third party on the theory that the third party’s negligence was totally responsible for the plaintiff’s injury. When a third party’s conduct furnishes a complete defense, the defendant may raise that conduct defensively in the answer but may not use it as a foundation for impleader.⁴⁰ Another route sometimes exists. If the plaintiff has brought separate actions against two defendants, one who claims the other is solely responsible may be able to effect joinder by consolidating the actions.⁴¹

The direction of liability matters because the plaintiff decides whom to sue. Return to a jurisdiction that allows no contribution. Wellington could not say, “Here, Napoleon, you sued me, but you really should have sued us both, so here’s Robespierre; go at him,” because that would let the defendant dictate to the plaintiff whom to sue, in defiance of the doctrine that the plaintiff is master of her claim.⁴² The amendment that closed this door rested on the same rationale: a defendant should not be able to force a plaintiff to sue an additional party the plaintiff has chosen not to sue, simply because that party may also be liable to the plaintiff.⁴³ Whether the court can accord complete relief among the existing parties without the nonparty is a different inquiry under Rule 19, and Rule 14 asks only whether the nonparty owes reimbursement to the defending party.⁴⁴

Rule 14 once allowed exactly what the amendment removed. Before the 1948 amendment, a defendant could implead a person directly liable to the plaintiff, and the option caused two problems. First, the plaintiff sometimes declined to press a claim against the added party and could not be compelled to amend the complaint, so no one had alleged a claim against the third-party defendant and the third-party action had to be dropped. Second, an amendment adding a direct claim against the third party, if allowed, would sometimes have destroyed the diversity of citizenship on which federal jurisdiction rested.⁴⁵ Requiring the third party to owe something to the defendant solves both problems, because the new party enters on a claim the defendant itself asserts.

Overlapping facts cannot substitute for derivative liability. A third-party claim that arises from the same general facts as the main claim is not permitted when it rests on a separate and independent claim, because the third party’s liability must be derivative, and a third party may be impleaded only when the original defendant is trying to pass all or part of its liability to it.⁴⁶ In Price v. CTB, Inc., Latco, sued over chicken houses it had built, impleaded ITW, the manufacturer of the nailguns and nails. Latco’s theory was that if it were held liable for its construction, the true fault lay with ITW’s products, which is exactly the pass-through the rule requires.⁴⁷

A defendant’s other grievances against the same nonparty show where the line falls. France sues DeLesseps for faulty construction, and DeLesseps impleads Said on a right to indemnity, which the court can enforce by a conditional judgment.⁴⁸ DeLesseps also claims that Said failed to deliver some camels. That claim is clearly distinct from the faulty construction claim, and Said’s liability for the camels would exist whether France wins, loses, or never sues, so it passes no part of France’s recovery to Said. The rule’s “may be liable to it for all or part of the claim against it” language confines the defendant’s options on purpose. A broader rule would introduce many tangential claims that share few witnesses or factual or legal issues with the main claim.⁴⁹ The camel claim is not lost. Once DeLesseps has properly impleaded Said under Rule 14, Rule 18(a) lets him add related or unrelated claims, but Rule 18(a) cannot bring Said into the suit in the first place.⁵⁰

Rule 14(a) never reaches a third party claimed to be solely liable to the plaintiff, and the one exception is the special practice for maritime claims in Rule 14(c).⁵¹ Rule 14(c)(1) applies when a plaintiff asserts an admiralty or maritime claim under Rule 9(h). It lets the defendant bring in a third-party defendant who “may be wholly or partly liable,” either to the plaintiff or to the third-party plaintiff, for remedy over, contribution, or otherwise on account of the same transaction, occurrence, or series of transactions or occurrences.⁵² Under Rule 14(c)(2), the third-party plaintiff may demand judgment in the plaintiff’s favor against the third-party defendant, who must then defend under Rule 12 against the plaintiff’s claim as well as the third-party plaintiff’s claim, and the action proceeds as if the plaintiff had sued both.⁵³ The third-party defendant in that posture is subject to judgment in favor of the plaintiff even though the original defendant is not liable, so all potential joint tortfeasors may be made parties.⁵⁴

The exception reaches only as far as joinder. Rule 14(c) merely allows joinder and does not confer jurisdiction, so jurisdiction over the added claims and parties must come from elsewhere.⁵⁵ When a maritime claim is brought in state court or at law in federal court, that court’s ordinary procedure applies, except for an admiralty procedural rule that is an integral part of the substantive maritime right.⁵⁶

Substantive Law Supplies the Right

Rule 14(a)(1) authorizes impleader of a nonparty who “is or may be liable” to the defending party, but it does not say when one person owes another reimbursement.⁵⁹ That question belongs to substantive law. The legal theory underlying an impleader claim must be one that the relevant substantive law recognizes, and impleader cannot create a cause of action that has not previously been recognized. The device is a procedural mechanism that merely accelerates the prosecution of otherwise recognized claims.⁶⁰ Every successful impleader therefore rests on two things: the vehicle that Rule 14 supplies and the right that substantive law supplies, whether indemnity, contribution, subrogation, or warranty. Without the right, the vehicle has nowhere to go.

The reason for the tie appears when you imagine the rule working the other way. Rule 14 exists to put a derivative claim before the same factfinder as the main claim, and it was not built to decide who owes whom money. A rule that could itself create reimbursement duties would change what claims exist merely by changing how they are heard. Tying impleader to an existing right keeps the device an efficiency tool and leaves the underlying liability where substantive law put it.

The sources show where the right comes from. In a suit arising from Kroger’s death, OPPD impleaded Owen and alleged only that Owen’s negligence caused the death. The third-party complaint never spelled out the basis of Owen’s liability to OPPD, but the court understood OPPD to have relied on the state common-law right of contribution among joint tortfeasors.⁶¹ The FDIC’s contribution count in Lehman likewise stood on a Massachusetts statute giving a right of contribution among persons jointly liable in tort for the same injury.⁶² Where the right is missing, impleader fails. If the polo match took place in a jurisdiction that allowed no contribution between joint tortfeasors, Robespierre might still be liable to Napoleon directly, but he would owe Wellington nothing, so Wellington could not implead him.⁶³

Hypothetical Illustration

A homeowner sues a landscaper for flooding caused by a faulty drainage installation. The landscaper wants to implead the neighbor, whose own regrading may also have contributed to the flooding, and pleads only that the neighbor is a joint wrongdoer who should share the loss. The governing law recognizes no contribution among joint tortfeasors, and the landscaper has no contract, warranty, or insurance relationship with the neighbor that could support indemnity or subrogation. The neighbor may be liable to the homeowner directly, but the neighbor owes the landscaper nothing under any recognized theory. Rule 14 cannot fill that gap, so the third-party complaint fails. If the neighbor had instead agreed by contract to indemnify the landscaper for drainage claims, the landscaper would hold a recognized right, and impleader would be proper.

The defendant’s first task is therefore to identify the recognized theory that supports the claim over. Because the claim is contingent, the court does not wait to learn whether the defendant will lose the main case before allowing impleader.⁶⁴ The court asks at the outset whether a recognized right could pass liability to the third party, and if the added complexity threatens the plaintiff, the court can order a separate trial under Rule 42(b).⁶⁵