E-Alert Case Updates

Upon Applying the Kapiloff factor test, the District Court Abstained for Exercising Jurisdiction in a Declaratory Judgment Action and Granted Defendant’s Motion to Dismiss

First Mercury Insurance Co. v. The Earleigh Heights Volunteer Fire Co. of Anne Arundel County
No. ELH—14—3156 (D. Md. December 22, 2014)
by Sarah M. Grago, Law Clerk
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://cases.justia.com/federal/district-courts/maryland/mddce/1:2014cv03156/293086/13/0.pdf?ts=1419083808

In First Mercury Insurance Co. v. The Earleigh Heights Volunteer Fire Co. of Anne Arundel County, the United States District Court for the District of Maryland granted Defendant’s Motion to Dismiss Plaintiff’s filing seeking a declaratory judgment. The Plaintiff, First Mercury Insurance Co. (“Mercury” or “Insurer”), initiated this action against Defendant Earleigh Heights Volunteer Fire Company of Anne Arundel County (“Fire Company”) to settle a question of insurance coverage that related to a tort action pending in the Circuit Court for Anne Arundel County.

The underlying tort litigation arose from a tragic accident that occurred during a carnival sponsored by the Fire Company and operated by Frank Joseph & Sons, Inc. d/b/a Jolly Shows, (“Jolly”). A pedestrian was crossing Ritchie Highway to attend the carnival when a car fatally struck her. Her surviving family filed a wrongful death action against the Fire Company and Jolly alleging both parties were negligent in failing to secure a safe crossing at a roadway adjacent to the carnival. Mercury, Jolly’s insurer, defended Jolly, as an insured, and the Fire Company as a named “additional insured.”

The Plaintiffs in the tort action, however, voluntarily dismissed their claims against Jolly. As a result, Mercury stopped defending Jolly and the Fire Company, although the latter was still a Defendant in the tort action. Mercury communicated to the Fire Company that it ceased its defense because the remaining claims were solely against the Fire Company and did not arise out of the insured’s operations. Mercury claimed it did not have a duty to defend the Fire Company.

When the Fire Company disputed Mercury’s removal, Mercury filed a declaratory judgment action in this court asserting that it had no duty to defend and/or indemnify the Fire Company regardless of the dismissal of Jolly. In response, the Fire Company filed a Motion to Dismiss arguing that the declaratory action should be litigated in state court where the Fire Company had previously (three months prior) filed a request for declaratory judgment on the same issue and the request is still pending.

With regard to the state action, the Fire Company filed a motion in the state declaratory action to consolidate the case with the tort action and, further, it requested a stay of the state declaratory action pending resolution of the tort action.¹

For guidance, the court looked to the rules, case law and other statutes governing federal jurisdiction. The court reiterated that federal courts may not exercise jurisdiction absent a statutory basis, but, when they have a basis, they must usually exercise it. In other words, federals courts have a “virtually unflagging obligation . . . to exercise the jurisdiction given them” absent “exceptional circumstances” yet, the court explained that a different set of guidelines exist in the declaratory judgment context. Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976).

The Supreme Court reaffirmed this framework by stating that district courts have “greater discretion” to abstain from exercising jurisdiction “in declaratory judgment actions than that permitted under the ‘exceptional circumstances’” test that district courts must otherwise satisfy to abstain. Wilton v. Seven Falls. Co., 515 U.S. 277, 286 (1995). In other words, the “normal principle that federal courts should adjudicate claims within their discretion yields to considerations of practicality and wise judicial administration” in the declaratory judgment context. Wilton, 515 U.S. at 288.

In declaratory judgment actions, federal courts’ jurisdiction springs from the Declaratory Judgment Act, 28 U.S.C. § 2201 (a) that, in its statutory language, reflects a “textual commitment to discretion.” Wilton, 515 U.S. at 286. The Act provides that where a federal action that seeks only discretionary declaratory relief is before a federal court, and there is a parallel proceeding pending in a state court, the district court may either stay the suit in favor of state court action or abstain from exercising jurisdiction by dismissing the federal suit. Myles Lumber Co. v. CNA Fin. Corp., 233 F.3d 821, 823 (4th Cir. 2000).

The Fourth Circuit has instructed district courts that such an abstention, referred to as a Wilton/Brillhart abstention, is appropriate when it will settle legal issues and afford relief. Specifically, the Fourth Circuit noted that when there is a related state court proceeding pending, courts should also bear in mind considerations of “federalism, efficiency, and comity.” Penn-America Ins. Co. v. Coffey, 368 F.3d 409, 412 (4th Cir. 2004).

The Fourth Circuit set forth a balancing test that included several factors, referred to as the “Kapiloff factors,” to assist district courts in evaluating whether to exercise their discretion as to declaratory judgment actions. The factors include: (1) whether the state has a strong interest in having the issues decided in its courts; (2) whether the state court could resolve the issues more efficiently than the federal courts; (3) whether the presence of the “overlapping issues of fact or law” might create unnecessary “entanglement” between state and federal courts; and (4) whether the federal action is mere “procedural fencing,” in the sense that the action is merely the product of forum shopping. United Capitol Ins. Co. v. Kapiloff, 155 F.3d 488, 493-94 (4th Cir. 1998).

In the case at bar, the court found that the facts weighed in favor of granting Defendant’s motion to dismiss the Federal action in light of the pending state court action. In reaching this conclusion, the court applied each of the above factors.

With regard to the first factor, the court found that although Maryland had an interest in having the matter of insurance coverage decided in state court, that the state interest was not strong enough to weigh against the exercise of federal jurisdiction. While many factors of the case connected it to the state, including that the coverage involved conduct occurring in Maryland that allegedly caused damages to Maryland residents, the court honed in on the legal issues. The Fire Company failed to frame the legal issues present, i.e., contract interpretation and agency, as complicated or non-standard legal matters. The court noted that in order for this factor to weigh in favor of the state, the question of law must involve more than a routine application of “settled principles of law.”

The next factor, however, the court found weighed heavily in favor of dismissing the action so that it could be resolved in state court. The court found that the matters overlapped and, further, that a federal declaration that an insurer had no duty to indemnify could be rendered moot by a later state verdict for the insured. Additionally, the Fire Company’s assertion that it will only seek indemnification after resolution of the tort action if there was a judgment against it gave the court reason to conclude that allowing the litigation to continue in state court would be the more efficient avenue of resolution.

Similarly, the next factor weighed in favor of dismissing the action, as there were several overlapping issues of fact and law that would create unnecessary entanglement between federal and state courts. The court found that the federal and state courts would consider the same issues, albeit perhaps under different standards, rendering state and federal entanglement impossible to avoid.

Last, the fourth factor weighed in favor of dismissing the Federal declaratory action as well. The court found evidence to support that the Insurer filed the action in order to avoid being summoned to state court as the Insurer brought the action after a state action had been pending for months.

The court abstained from exercising jurisdiction and granted the Defendant’s motion to dismiss Plaintiff’s declaratory judgment action so as to allow the tort and coverage claims litigation to continue to state court.

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¹While the docket of the Tort Action reflects a motion to consolidate with the State Declaratory Action filed on November 13, 2014, there is no indication that a motion to stay was filed.