Opinion
Civil Action No. 3:01-CV-0593-D
September 26, 2001
MEMORANDUM OPINION AND ORDER
By separate motions, defendants CompUSA Inc. ("CompUSA") and James F. Halpin ("Halpin") move to dismiss this declaratory judgment action for lack of subject matter jurisdiction or, alternatively, to stay the action. For the reasons that follow, the court denies the motions.
I
Plaintiff Federal Insurance Company ("Federal") sues defendants CompUSA and Halpin seeking a declaration that it is not obligated to indemnify them under CompUSA's officers and directors insurance policy ("DO Policy"). A Texas state court jury returned a verdict against Halpin for $234 million in compensatory and punitive damages. After the verdict, but before the state court entered judgment, Federal brought the instant declaratory judgment action. It alleges that CompUSA and Halpin breached a notice obligation that is a condition precedent to Federal's duty to indemnify by failing to provide it with notice of the state court lawsuit until more than one year after they became aware of the claim against them. After Federal initiated the present suit, the state court entered a take nothing judgment in favor of CompUSA and Halpin. The judgment has been appealed.
CompUSA and Halpin move to dismiss the present declaratory judgment action for lack of subject matter jurisdiction, or, alternatively, move to stay the suit pending final resolution of the state court case.
II
Defendants contend the court lacks subject matter jurisdiction because no "case of actual controversy" presently exists as to Federal's duty to indemnify CompUSA and Halpin. The Declaratory Judgment Act provides:
In a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration[.] Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.28 U.S.C. § 2201 (a). The fundamental inquiry in determining whether a "case of actual controversy" exists is whether, taken as a whole, the facts alleged demonstrate "that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." Md Cas. Co. v. Pac. Coal Oil Co., 312 U.S. 270, 273 (1941) (citing Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239-242 (1937)). Defendants contend the requisite immediacy is lacking because no adverse judgment presently exists as to either of the parties insured under the DO Policy. The court disagrees. The state court's judgment notwithstanding the verdict in favor of CompUSA and Halpin may be reversed on appeal, and settlement negotiations are ongoing. Absent a declaration of its legal obligations, Federal is prevented from making an informed decision regarding its participation in such negotiations. Federal could at any time be subjected to a demand that it contribute to a settlement with the state court plaintiffs to settle the case on appeal. Federal would then face a choice of either making such a contribution despite the conclusion that it does not owe any duty to indemnify, or refusing to contribute and thus potentially becoming subject to a suit for bad faith breach of the indemnity contract. Relevant Supreme Court and Fifth Circuit decisions make clear that a "case of actual controversy" may be found to exist regarding an insurer's duty to indemnify at a time before the final determination of the insured's liability. See Md. Cas. Co., 312 U.S. at 273-74; Hardware Mut. Cas. Co. v. Schantz, 178 F.2d 779, 780 (5th Cir. 1949); Monticello Ins. Co. v. Patriot Sec., Inc., 926 F. Supp. 97, 101 (E.D. Tex. 1996); cf. Am. States Ins. Co. v. Bailey, 133 F.3d 363, 368 (5th Cir. 1998) ("An actual controversy may exist when an insurance carrier seeks a declaratory judgment that it has a duty neither to defend nor indemnify its insured in a state court action that has not yet proceeded to judgment."). Accordingly, the court holds that Federal's complaint presents a substantial controversy between parties that have adverse legal interests of sufficient immediacy and reality to support the exercise of jurisdiction.
III
CompUSA and Federal contend in the alternative that the court, in its discretion, should refuse to exercise jurisdiction. The principle that a federal district court has discretion over the exercise of jurisdiction in declaratory judgment actions is well settled. See Wilton v. Seven Falls Co., 515 U.S. 277, 288 (1995) ("[A] district court is authorized, in the sound exercise of its discretion, to stay or to dismiss an action seeking a declaratory judgment before trial or after all arguments have drawn to a close."). "In the declaratory judgment context, the normal principle that federal courts should adjudicate claims within their jurisdiction yields to considerations of practicality and wise judicial administration." Id Here, considerations of practicality and wise judicial administration do not favor a refusal to exercise jurisdiction or the granting of a stay. Federal has represented to the court that it is presently pursuing only count one of its original complaint — its contention that it owes no duty to indemnify because CompUSA and Halpin failed to comply with the notice requirement of the DO Policy. Resolution of this claim requires consideration only whether (1) CompUSA and Halpin breached the notice obligation and (2) whether such breach, if any, constitutes a failure of a condition precedent to Federal's liability under the DO Policy. These questions can be decided without a significant expenditure of judicial resources, and the resolution of these issues do not depend on any rulings that may or may not be made in the state appellate or trial court. No significant prejudice will accrue to either CompUSA or Halpin if Federal's declaratory judgment action is allowed to proceed.
Accordingly, the court declines to stay this case.
* * *
CompUSA's June 25, 2001 motion to dismiss and alternative motion to stay, and Halpin's July 6, 2001 motion to dismiss and alternative motion to stay are denied.
SO ORDERED.