Opinion
1:03-cv-0240-DFH
December 29, 2003
ENTRY ON ABSTENTION AND RELATED MOTIONS
The principal question before the court in this declaratory judgment action is whether to abstain from deciding the merits of this case and thus defer to an action now pending in the Indiana state courts. The parties have argued the issues primarily under the Colorado River abstention doctrine, which allows a district court to defer to state court proceedings and to abstain from exercising jurisdiction when "exceptional circumstances" make that a prudent course. See Colorado River Water Conservation Dist v. United States, 424 U.S. 800 (1976). Because this is a declaratory judgment action, however, the controlling standard is that in Wilton v. Seven Falls Co., 515 U.S. 277 (1995) (affirming decision to decline to exercise jurisdiction in declaratory judgment action on insurance coverage); see also Pence v. Lightning Rod Mutual Ins. Co., 203 F. Supp.2d 1025, 1028-29 (S.D. Ind. 2002) (staying federal declaratory judgment action over insurance coverage where issue was also before state courts).
This case has its origins in a contract between defendant Directions in Design, Inc. and defendants Thomas and Christine Roller. The Rollers hired Directions in Design to build a home for them. The Rollers experienced "water intrusion" in their house, which has caused them a variety of problems and expenses. The Rollers filed a suit in state court against Directions in Design alleging that its negligent and defective construction had damaged them. Directions in Design tendered the defense of the claim to its liability insurer, plaintiff American Fire and Casualty Company. American Fire disputed coverage but agreed to provide a defense to the Roller action under a reservation of rights. American Fire then filed this federal action against both Directions in Design and the Rollers. Raising numerous objections to coverage, American Fire seeks a declaratory judgment to the effect that it does not owe Directions in Design a defense or a duty of indemnity in the Roller action.
After American Fire filed this action, the Rollers amended their state court action to name American Fire as a defendant. They seek a declaration from that court that American Fire is obliged to indemnify Directions in Design for their losses. Under the Colorado River doctrine, the Rollers then moved for this court to stay this federal action filed by American Fire so that the state court may resolve the insurance coverage issues as well as all related claims arising from the water intrusion problem. American Fire opposes abstention and seeks to have this court decide the coverage issues.
The court finds, in the exercise of its discretion under the Declaratory Judgment Act, 28 U.S.C. § 2201-2202, that it should not exercise jurisdiction and should instead abstain so that the state court may resolve the entire dispute, involving all the interested parties. As the Supreme Court wrote in Brillhart v. Excess Insurance Co. of America, 316 U.S. 491, 495 (1942): "Ordinarily it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in a state court presenting the same issues, not governed by federal law, between the same parties." Accordingly, this action is stayed and administratively closed pending a decision by the state courts.
Discussion
Under Colorado River, a district court may exercise its discretion to decline to exercise jurisdiction over an action that is otherwise properly before it. The doctrine is based on considerations of prudent judicial administration and the value of "comprehensive disposition of litigation." 424 U.S. at 817. Under the doctrine, a district court may abstain from exercising jurisdiction if there is a parallel state court proceeding that will resolve the dispute between the parties and if an evaluation of relevant circumstances indicates that abstention is the more prudent course than duplicative litigation. AAR International, Inc. v. Nimelias Enterprises S.A., 250 F.3d 510, 518 (7th Cir. 2001). The presumption is against abstention, the Seventh Circuit has taught, but abstention may be appropriate if the relevant factors show "exceptional circumstances." Id.; Sverdrup Corp. v. Edwardsville Community Unit Sch. Dist. No. 7, 125 F.3d 546, 550 (7th Cir. 1997).
Under the Declaratory Judgment Act, the district court has broader discretion than permitted under the Colorado River doctrine to consider whether to exercise its jurisdiction. The Supreme Court has made clear that a district court may decline to exercise declaratory judgment jurisdiction over insurance coverage issues that can be resolved in pending state court proceedings. In Wilton v. Seven Falls Co., 515 U.S. 277 (1995), the Court affirmed a district court's decision not to decide the merits of an insurance coverage case much like this one, where the larger controversy involving more parties was pending in the state courts. The Court reasoned that its earlier decision in Brillhart v. Excess Insurance Co. of America, 316 U.S. 491 (1942), governed the case, and that its standard had not been narrowed or supplanted by Colorado River. Wilton, 515 U.S. at 286-88.
In Brillhart, an insurer filed a declaratory judgment action in the federal district court seeking a declaration that it owed no duty of coverage on claims arising from a fatal traffic accident. The district court dismissed the case because the coverage issue was before a state court in a garnishment proceeding following a default judgment against the (arguably) insured tortfeasor. The court of appeals reversed and ordered the district court to decide the coverage issue on the merits. The Supreme Court, emphasizing the discretionary character of jurisdiction under the Declaratory Judgment Act, remanded to the district court with a very different directive: to exercise its discretion, and in particular to consider "whether, under applicable local law, the claims sought to be adjudicated by the [insurer] in this suit for a declaratory judgment had either been foreclosed by Missouri law or could adequately be tested in the garnishment proceeding pending in the Missouri state court." 316 U.S. at 495-96. Before reaching that conclusion, the Supreme Court made the observation quoted above: "Ordinarily it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in a state court presenting the same issues, not governed by federal law, between the same parties." Id. at 495.
That sentence describes the situation this court faces. Another suit is pending in state court between the same parties, and it presents the same issues under state law, not federal law.
First, the Roller action in state court and this action are parallel cases for purposes of Wilton, Brillhart, and Colorado River. As the pleadings frame the Rolleraction at this time, the Rollers have sued Directions in Design and several subcontractors and suppliers — Jeld-Wen of Canada, Ltd., Wickes, Inc., Raulie Construction, and Greg Lockhart Masonry — as well as both American Fire and Allstate Insurance Company, which insured the Rollers's home. Directions in Design has filed what it has labeled "third party claims" (but which seem, at least now, to be cross-claims) against co-defendants Jeld-Wen, Wickes, Raulie Construction, and Greg Lockhart Masonry.
The Rollers allege that the house was built defectively because it lacked an effective moisture barrier and allowed water intrusion, which damaged the house. They recently amended their complaint to allege also that two exterior decks were built defectively, so that one collapsed in May 2003 (causing injuries) and the other also had to be destroyed and replaced. The Rollers have sued Directions in Design for breach of contract, breach of the implied warranty of habitability, and negligence. They also seek punitive damages. The Rollers have sued Jeld-Wen, Wickes, Raulie, and Lockhart for breach of express and implied warranties. The Rollers have also sued the two insurance companies for declaratory judgments as to coverage.
The Rollers's claim against American Fire is relatively novel under Indiana law, but it is authorized by a recent Indiana Court of Appeals decision, Wilson v. Continental Casualty Co., 778 N.E.2d 849 (Ind.App. 2002). There the state court held that the victim of an alleged tortfeasor may file a declaratory judgment action directly against the tortfeasor's insurer if the insurer has denied coverage or is defending an action under a reservation of rights. 778 N.E.2d at 852. In essence, the Wilson court extended to reservation of rights cases the prior holding of Community Action of Greater Indianapolis, Inc. v. Indiana Farmers Mut. Ins. Co., 708 N.E.2d 882 (Ind.App. 1999), which authorized such declaratory actions by victims where the tortfeasor's insurer simply denies coverage.
To be parallel under the Colorado River doctrine, the two cases need not be identical. Interstate Material Corp. v. City of Chicago, 847 F.2d 1285, 1288 (7th Cir. 1988). Suits are parallel if "substantially the same parties are litigating substantially the same issues simultaneously in two fora." AAR International, 250 F.3d at 518, quoting SchneiderNat'l Carriers, Inc. v. Carr, 903 F.2d 1154, 1156 (7th Cir. 1990). The doctrine calls for a pragmatic judgment as to whether there is a "substantial likelihood" that a decision in one case will resolve all issues in the other case. AAR International, 250 F.3d at 518.
That standard is easily satisfied here. All the parties in this federal case — the Rollers, Directions in Design, and American Fire — are also parties to the state court action. The issue before this court, whether American Fire is obligated to defend and indemnify Directions in Design for the construction defects in the Rollers's home, is also before the state court. A decision in one case is virtually certain to amount to res judicata in the other. Accordingly, the two actions meet the first requirement of Colorado River, parallel state and federal proceedings. For the same reasons, they also easily satisfy the threshold for declining declaratory judgment jurisdiction under Wilton and Brillhart.
American Fire suggests several reasons that the state court proceeding is not a suitable forum for resolution of the issues presented in this federal action. First, American Fire contends that its issues are simple and could be decided quickly, without subjecting it to the expense and delay and discovery involved in the more comprehensive state court case. Second, American Fire suggests that the Rollers added it as a defendant to introduce the otherwise inadmissible fact of (arguable) liability insurance in the state trial. Third, American Fire contends that the lawyer it hired to defend Directions in Design in the state court action would face an "untenable conflict of interest."
American Fire made these points in a tendered surreply brief that attached a brief it had filed in the state court seeking dismissal or stay of the claim against it. The Rollers have objected to the surreply brief, but that objection is overruled and the surreply brief shall be filed. The Rollers waited until their own reply brief to argue Wilton and Brillhart, which actually set forth the applicable law here. American Fire is entitled to a fair opportunity to respond on the decisive issues and law. If the Rollers had properly argued the issues in their opening brief, there would not have been a need for the surreply brief.
These arguments are not persuasive. First, the samples of briefing and discovery before this court show that at least some of the many coverage issues raised by American Fire cannot be decided without a reasonably full opportunity to explore the underlying events involving Directions in Design's construction and the damage that has resulted. The focus in litigating the coverage issue will be on the damage to the Rollers's home and the construction work done by Directions in Design and its subcontractors. Those facts will also be the principal focus of the state court litigation. American Fire alleges here that it owes no duty of coverage because there was no "occurrence," no "property damage," and no "bodily injury," and because the circumstances of the damage to the Rollers's home are excluded by "builders risk" exclusions, a "contractual liability" exclusion, and the "expected or intended injury" exclusion. As a result, it makes more sense to have the coverage issues determined in one comprehensive proceeding rather than in a separate case.
By comparison, for example, a defense asserting that the insured lied in the original application might present legal and factual issues completely separate from the underlying dispute. On a related note, it would be theoretically possible for this court to decide American Fire's duty to defend and to have the state court decide American Fire's duty to indemnify. See, e.g., Nationwide Ins. v. Zavalis, 52 F.3d 689, 693-94 (7th Cir. 1995) (pre-Wilton decision affirming district court's decision not to reach issue of duty to indemnify, but remanding for decision on duty to defend). American Fire has not suggested that the coverage issues be divided between the two courts, so the court has not pursued that option.
Second, the state court has mechanisms available to manage the issue of insurance coverage if the state court proceeding goes to trial. Even if those mechanisms included bifurcation of trial, that still would not defeat the overall economies that could be achieved by managing at least all pretrial proceedings in one case.
Third, the attorney conflict of interest issues, which can arise any time that coverage is disputed, will exist regardless of whether there are two active cases or only one. For example, suppose both cases proceeded and a witness from Directions in Design were deposed in this case about subjects relevant to the insurance coverage disputes. An attorney for the Rollers would be present, and an attorney for American Fire would be present. An attorney for Directions in Design would also need to be present. Even if different lawyers represented Directions in Design in the two cases, the lawyer defending the deposition in the coverage case could not do an adequate job without being fully informed about the state court litigation. If the lawyer were not so informed and were not looking out for effects on the state court litigation, the lawyers for the Rollers and/or American Fire could have a field day at the expense of Directions in Design. Having two separate actions offers no advantage for resolving such conflicts.
In short, the state courts are fully capable of resolving the state law issues that are presented in these two parallel cases, and there is no reason for this court to exercise its jurisdiction under the Declaratory Judgment Act. As American Fire points out, of course, there was nothing improper about its filing this lawsuit. The court has subject matter jurisdiction, and there is an actual controversy between the parties. As the Supreme Court explained in Brillhart, though, those facts do not compel the court to exercise its jurisdiction and to issue a declaratory judgment. 316 U.S. at 494; accord, Wilton, 515 U.S. at 282-83. Under the reasoning of both Brillhart and Wilton, there is no good reason for this court to proceed to decide the same issues of fact and state law that are also before the state court.
Accordingly, this court exercises its discretion under the Declaratory Judgment Act to stay this case. See Wilton, 515 U.S. at 288 n. 2 (stay is preferable to dismissal); Pence, 203 F. Supp.2d at 1029 (staying declaratory judgment action on insurance coverage because a pending state court proceeding would resolve issue). The Rollers's motion for abstention is granted, and this action is hereby STAYED in all respects pending resolution of the state court action. If there are unexpected developments in the state courts that undermine the rationale for this decision, any party may move to lift the stay for good cause. For now, the clerk will close this case administratively. Plaintiff's motion to amend its complaint to address coverage of the Rollers's claims based on faulty construction of their decks is denied without prejudice to renewal if this action should come back to life. The decks question is already squarely before the state court.
So ordered.