Opinion
No. CV-04-176-ST.
June 18, 2004
OPINION AND ORDER
INTRODUCTION
On February 6, 2004, Travelers Property Casualty Company of America, fka Travelers Indemnity Company of Illinois ("Travelers"), filed this action alleging two claims for declaratory relief against Steven Alex Martella ("Martella"). Travelers issued an insurance policy to Martella's former employer, Fabrication Products, Inc. ("Fabrication"). In November 2002, Martella allegedly caused an explosion by igniting acetylene on the job site. Travelers seeks declarations that Martella's alleged actions fell outside the scope of his employment and are excluded as "intentional" acts under the policy.
Travelers alleges jurisdiction based on diversity of citizenship under 28 U.S.C. § 1332 and seeks declaratory relief under the Declaratory Judgment Act, 22 U.S.C. § 2201. All parties have consented to allow a Magistrate Judge to enter final orders and judgment in this case in accordance with FRCP 73 and 28 U.S.C. § 636(c). Three motions are now before this court. For the reasons that follow, Travelers' Motion for Summary Judgment (docket #5) is DENIED; Martella's Cross-Motion for Summary Judgment and Motion to Stay Proceedings (docket #9) is GRANTED; and Martella's Motion for Leave to File an Amended Answer and Counterclaim (docket #15) is GRANTED. This action is STAYED pending resolution of the underlying state court litigation.
ANALYSIS
I. Facts A. Travelers' Policy and the State Court Litigation
Travelers insured Fabrication from October 1, 2002, to October 1, 2003, under a commercial general liability policy. Travelers' Facts, Ex A. Fabrication was a subcontractor on the Tom McCall Middle School construction project ("the construction project") in late 2002. Martella was employed by Fabrication on the construction project, but was terminated on November 8, 2002, because he allegedly ignited acetylene causing a loud explosion.
Three separate personal injury actions were filed against Martella by employees of Advanced Technology Group, another subcontractor on the construction project. The three cases are Curtis Phillips v. Fabrication Products, Inc et al., Multnomah County Case No. 030606390 (Travelers' Facts, Exhibit B) ("the Phillips action"); Andrew Watson v. Fabrication Products, Inc., et al., Multnomah County Case No. 031213957 (Martella's Responsive Facts, Ex 101); and Troy Petersen v. Fabrication Products, Inc., et al., Multnomah County Court Case No. 040303062 (Martella's Responsive Facts, Ex 102) (collectively, "the state court litigation").
Each complaint in the state court litigation names Martella, Fabrication, and the general contractor on the construction project, Swinerton Builders Northwest, Inc. ("Swinerton"), as defendants, alleges the same injury (hearing loss, tinnitus, ear pain and headaches), involves the same acts or occurrences, and alleges, inter alia, that "defendant Martella ignited a bottle filed with acetylene, creating a loud explosion that caused profound and permanent injuries to the plaintiff . . ." and that Martella was negligent in the following manner:
1. In failing to restrict his use of defendant Fabrication's equipment and supplies to its proper function;
2. In failing to comply with the safety regulations imposed by defendant Fabrication and/or defendant Swinerton;
3. In failing to warn other workers before the ignition of the acetylene; and
4. In failing to act in a reasonably safe manner at a construction site.
Travelers, the plaintiff in the present federal court action, is also the insurer defending Fabrication and Swinerton in the underlying Phillips action. Travelers is providing a defense for Martella in the underlying Phillips action under a reservation of rights.
The Complaint filed in the Phillips action states that Martella "was an employee for defendant Fabrication," Travelers' Facts, Ex B, ¶ 4, and that "Martella was acting within the course and scope of his employment and, as such, defendant Fabrication is liable for his negligence under the doctrine of respondeat superior." Id, Ex B, ¶ 12. B. The Explosion Incident
The facts in this section are taken from deposition testimony in the Phillips action. Martella agrees that witnesses testified to these facts, and offers to submit other facts under seal. However, even assuming the facts of the explosion incident in the light most favorable to Travelers, Travelers is under an obligation to defend Martella and this case must be stayed pending resolution of the state court litigation. For purposes of disposing of these motions only, this court will view these facts in the light most favorable to Travelers, without any submissions under seal from Martella.
Everett Niell ("Niell") was working with Martella on the day of the incident. At some point, Martella left the area where they were working in order to go to the bathroom. While he was gone, Martella set off two explosions by filling bottles with acetylene and igniting them. Niell Depo, pp. 27, 36. He ignited two devices because the first was not loud enough. Id at 47. Niell felt that Martella's actions were stupid and went beyond horseplay. In 26 years of iron work, he had never heard one of these devices go off. Id at 36-37. Niell agreed that Martella broke several company rules including the rule against horseplay and the rule against misuse of company materials. Id at 38.
Another co-worker, William Starke, testified that during the coffee break immediately after the second explosion, Les Stewart ("Stewart"), the Fabrication supervisor, asked who had created the noise. Martella admitted he did it and Stewart told him to get his tools and leave the job site. Starke Depo, p. 29. A third iron worker, Michael Lee Sturdevant, testified that Martella's conduct was against the rules and something for which he should have been fired and never rehired. Sturdevant Depo, p. 16.
Martella's conduct violated the safety policies for both Fabrication and Swinerton. Stewart Depo, p. 20. Martella used Fabrication gas to fill the bottles but was not instructed to do so. Id at 25-26. When Stewart fired Martella the following Monday, Martella admitted "he F'd up." Id at 81. II. Jurisdiction
Initially, this court must determine whether it must or may exercise jurisdiction over this case. Travelers alleges two claims for declaratory relief, one seeking a declaration that Martella's alleged actions were not within the scope of his employment with Fabrication, and one that Martella's actions, as set forth in the Phillips action, describe an intentional act which is excluded from the policy Travelers issued to Fabrication.
Travelers alleges that the parties are diverse in citizenship and that the amount in controversy exceeds $75,000.00. Complaint, ¶¶ 1-3. Accordingly, Travelers invokes diversity jurisdiction under 28 U.S.C. § 1332. Id, ¶ 4. The difficulty with this argument is that Travelers has brought no claim for monetary relief. Instead, Travelers seeks purely declaratory relief under the Declaratory Judgment Act, which provides no independent basis for jurisdiction:
Travelers alleges that Martella "resides" in Oregon. Complaint, ¶ 2. A natural person's state citizenship is determined by the individual's "state of domicile" which is where the person "resides with the intention to remain or to which [he or] she intends to return." Kanter v. Warner-Lambert Co., 265 F.3d 853, 857 (9th Cir 2001). Nothing in the record suggests that Martella is a citizen of any other state.
After Travelers filed its motion for summary judgment, Martella filed a Motion for Leave to File an Amended Answer and Counterclaim (docket #15), seeking to add a claim for breach of the insurance contract with Travelers. Travelers objected to that motion, arguing that the proposed amended counterclaim raised new issues and did not mesh with the procedural status of this case. However, just before oral argument, Travelers withdrew that objection and then argued that jurisdiction in this court existed over the proposed counterclaim, which adds a monetary (as opposed to purely declaratory) element. In response to that argument, Martella withdrew the motion to amend from consideration for purposes of the jurisdictional issue. The parties need not engage in this type of procedural wrangling as amended pleadings may not be used to shore up otherwise jurisdictionally defective initial pleadings: "In determining federal court jurisdiction, we look to the original, rather than to the amended complaint. Subject matter jurisdiction must exist as of the time the action is commenced." Morengo Band of Mission Indians v. California State Bd. of Equalization, 858 F.2d 1376, 1380 (9th Cir 1988), cert denied, 488 U.S. 1006 (1989). Accordingly, this court must consider the jurisdictional issue without reference to the amendment proposed by Martella.
[T]he Declaratory Judgment Act is not a jurisdictional statute. It does not create subject matter jurisdiction where none otherwise exists. It only creates a particular kind of remedy available in actions where the district court already has jurisdiction to entertain a suit.Jarrett v. Resor, 426 F.2d 213, 216 (9th Cir 1970) (citations omitted).
As explained by the Ninth Circuit, "the Declaratory Judgment Act is deliberately cast in terms of permissive, rather than mandatory, authority." Government Employees Ins. Co. v. Dizol, 133 F.3d 133 F.3d 1220, 1223 (9th Cir 1998) ( en banc) (internal quotation marks and citations omitted). In exercising its discretion to accept or decline jurisdiction over cases under the Declaratory Judgment Act, this court "should avoid needless determination of state law issues;
. . . discourage litigants from filing declaratory actions as a means of forum shopping; and . . . avoid duplicative litigation." Id at 1225 (citations and footnote omitted). It may also consider such things as:
whether the declaratory action will settle all aspects of the controversy; whether the declaratory action will serve a useful purpose in clarifying the legal relations at issue; whether the declaratory action is being sought merely for the purposes of procedural fencing or to obtain a `res judicata' advantage; or whether the use of a declaratory action will result in entanglement between the federal and state court systems. In addition, the district court might also consider the convenience of the parties, and the availability and relative convenience of other remedies.Id at 1225 n 5, quoting American States Ins. Co. v. Kearns, 15 F.3d 142, 145 (9th Cir 1994) (J. Garth, concurring).
In this case, Travelers seeks the answers to two questions which turn on the interpretation of state contract law. Those issues will ripen if and when Martella is found liable in the state court litigation. While this court should not rush to determine issues of state law, these same issues will likely end up right back here even if dismissed now. Assuming Martella is found liable in the state court litigation, the same contract interpretation issues will be raised either in new state court actions (which will be subject to removal to this court if the jurisdictional amount is met) or in new original filings in this court. In short, dismissing this action at this juncture may simply result in the filing of a subsequent identical case if liability attaches in the underlying state court litigation against Martella. Because deciding these state law issues may well be unavoidable, this factor does not weigh in favor of dismissal.
For the same reasons, the bulk of the other factors this court must consider also do not weigh in favor of dismissal of this declaratory judgment action. In the event that Martella is found liable in state court and the subsequent contract interpretation issues are raised in another case which is then removed to this court, dismissal of this action will not discourage forum shopping, avoid duplicative litigation, result in any more or any less inconvenience to the parties (other than the payment of additional filing fees and filing of additional pleadings to create another case in the exact same procedural posture as this case is now), or avoid unnecessary entanglement of the federal and state court systems. In short, it is possible that the exact same issues will inevitably return to this court. If so, the legal issues will be identical to those raised now and will be critical to finally resolving the controversy and clarifying the legal relationships and responsibilities between Travelers and Martella.
Several other courts have addressed declaratory claims in cases procedurally similar to that faced by this court. Those courts have recognized that the concerns of duplicative litigation and preclusive effect simply are not an issue because the declaratory suit involves different parties and presents a fundamentally distinct dispute from that at issue before the state court. See, e.g., Agora Syndicate, Inc. v. Robinson Janitorial Specialists, Inc., 149 F.3d 371, 372-75 (5th Cir 1998); Nationwide Ins. v. Zavalis, 52 F.3d 689, 692-94 (7th Cir 1995); Continental Casualty Co. v. Coastal Savings Bank, 977 F.2d 734, 736-38 (2nd Cir 1992). After considering all the relevant factors, this court concludes that it would be a waste of judicial resources and an unnecessary procedural hurdle to the ultimate resolution of this matter to dismiss this case at this juncture. The better course is to accept jurisdiction.
Having made that determination, however, does not resolve the issue raised by Travelers in its summary judgment motion, to which this court now turns.
III. Motion for Summary Judgment and Cross-Motion for a Stay
In its motion, Travelers contends that it is entitled to summary judgment that Martella was not an insured under the Travelers policy, absolving Travelers of any duty to defend or indemnify Martella in the state court litigation. Specifically, Travelers insists that it is so obvious that Martella acted outside the scope of his employment with Fabrication when he ignited the acetylene that Martella is simply not an insured and not entitled to a defense in the state court litigation.
The record includes ample evidence to support the conclusion that Martella's conduct was outside the scope of his employment. However, this court concludes that Travelers is nonetheless bound to defend Martella and must wait to resolve the indemnity issue when and if necessary at the conclusion of the state court litigation.
Some courts have permitted declaratory relief denying a duty to defend, counseling against allowing plaintiffs' attorneys to creatively plead their way around insurance exclusions. See, e.g., Zavalis, 52 F.3d at 694-95 (applying Pennsylvania law). Whatever the policy-based merits of that position, Oregon law imposes a duty to defend if the allegations in the complaint provide any basis for coverage:
In evaluating whether an insurer has a duty to defend, the court looks only at the facts alleged in the complaint to determine whether they provide a basis for recovery that could be covered by the policy. . . . The insurer has a duty to defend if the complaint provides any basis for which the insurer provides coverage. Even if the complaint alleges some conduct outside the coverage of the policy, the insurer may still have a duty to defend if certain allegations of the complaint, without amendment, could impose liability for conduct covered by the policy. Any ambiguity in the complaint with respect to whether the allegations could be covered is resolved in favor of the insured.Ledford v. Gutoski, 319 Or. 397, 400, 877 P.2d 80, 83 (1994) (citations omitted, emphasis in original); see also, Marleau v. Truck Ins. Exchange, 333 Or. 82, 91, 37 P.3d 148, 153 (2001) ("An insurer has a duty to defend if the factual allegations of the complaint, without amendment, state a claim for any offense covered by the policy.").
An insurance company may have some basis to avoid a duty to defend if the pleadings tendered at the start of the case establish a clear basis for excluding coverage:
In Oregon Insurance Guarantee Assoc., . . . we held that the insurer had no duty to defend against a claim of trespass when the pleadings included a copy of a judgment holding the insured in contempt for violating an injunction prohibiting the insured from trespassing. Here, there was nothing regarding Corum's conviction in the pleadings tendered to Farmers.American Cas. Co. v. Corum, 139 Or. App. 58, 65 n10, 910 P.2d 1151, 1155 n10, adhered to on recon, 141 Or. App. 92, 917 P.2d 39 (1996).
In contrast, here, no factual determination has been made as yet in other litigation that Martella was acting outside the scope of his employment when he ignited the acetylene. Furthermore, the complaints filed in the state court litigation explicitly allege that Martella was acting within the course and scope of his employment with Fabrication. One of the negligence specifications does allude to the possibility that Martella was acting outside the scope of his employment, by alleging that he "fail[ed] to restrict his use of defendant Fabrication's equipment and supplies to its proper function." However, at least on their face, the remaining specifications of negligence against Martella contain no hint that he was acting outside the scope of his employment or acting intentionally. Instead, the pleadings allege that Martella "fail[ed] to comply with the safety regulations imposed by defendant Fabrication" and "fail[ed] to warn other workers before the ignition of the acetylene" and "fail[ed] to act in a reasonably safe manner at a construction site." Because those "factual allegations . . . without amendment" arguably state a claim for an offense covered by the policy, Travelers has a duty to defend Martella.
Travelers argues that Ledford and its progeny, including Corum, do not apply to the duty to defend analysis because this case presents the antecedent inquiry of whether Martella was an insured under the Travelers' policy. However, there simply is no escaping the blinders that the Oregon appellate courts have insisted that trial courts wear when it comes to deciding the issue of the duty to defend:
An insurer's duty to defend under an insurance contract is broader than its obligation to pay. The scope of the duty to defend is determined by comparing the terms of the insurance policy with the allegations of the complaint, to determine whether the allegations of the complaint show that there is a possibility that the policy provides coverage for the claims made. Any facts not alleged in the complaint are irrelevant in determining the existence of the duty to defend.Gebrayel v. Transamerica Title Ins. Co., 132 Or. App. 271, 275, 888 P.2d 83, 86, review denied, 321 Or. 47, 892 P.2d 83 (1995) (citations omitted); see also Weber v. Chicago Title Ins. Co. of Oregon, 169 Or. App. 24, 29-30, 7 P.3d 714, 716-17 (2000) (following Gebrayel).
Travelers relies on facts not alleged in the state court litigation to support a finding that Martella was acting outside the scope of his employment at the time he ignited the acetylene. Under Oregon law, those facts are irrelevant to determining Travelers' obligation to defend Martella.
With respect to its duty to indemnify, Travelers argues that the state court litigation may not answer the factual questions which will prove pivotal to deciding the issues raised in this litigation. Martella could be found liable in the state court litigation without any specific finding whether his conduct was within or outside the course and scope of his employment with Fabrication. In that event, Travelers will be forced to bring essentially the same factual record before this court as was brought before the state courts to resolve the issue of indemnity. While this outcome is altogether possible, this court is not in any position to rewrite Oregon case law regarding resolution of the issue of indemnity simply to expeditiously dispatch Travelers. The indemnity issue must await resolution of the liability issue. North Pac. Ins. Co. v. Wilson's Distributing Service, Inc., 138 Or. App. 166, 175, 908 P.2d 827, 832 (1995), review denied, 323 Or. 264, 916 P.2d 312 (1996). Inefficient though that course may ultimately prove to Travelers, it is the course chosen by the Oregon courts and one to which this court must adhere.
Although Fabrication would not be liable for Martella's negligence under the doctrine of respondeat superior unless Martella acted within the course and scope of his employment (as alleged in the Second Claim for Relief in the state court litigation), Fabrication could be found liable either under Oregon's Employer Liability Law, ORS 654.305 — .355, or for its own negligence (as alleged in the First and Third Claims for Relief).
There is no discerning the outcome of the state court litigation at this juncture. Ultimately, Martella may be exonerated of any liability in those actions, which may moot the issue of indemnity. If, on the other hand, Martella is found liable in the state court litigation, the issues raised by Travelers in this case will ripen.
In sum, Travelers is obligated to defend Martella in the state court litigation because there is some conduct arguably covered by the Travelers policy which forms the basis for the claims in that litigation. Despite the fairly strong evidence that Travelers has adduced to bolster its claim that Martella acted outside the course and scope of his employment, clear Oregon precedent prevents Travelers from escaping its duty to defend Martella because the pleadings in the state court litigation are premised, at least in part, on conduct arguably within the Travelers policy. In short, Travelers' motion for summary judgment must be denied on the merits regarding its duty to defend Martella, and denied as premature regarding its right of indemnity.
IV. The Motion for Leave to File an Amended Answer and Counterclaim
In his Motion for Leave to File an Amended Answer and Counterclaim (docket #15), Martella seeks to add a counterclaim against Travelers for breach of contract premised on its failure to defend and indemnify him.
Except to the extent that the counterclaim would reference coverage questions arising from the Phillips litigation, Travelers opposes the addition of a counterclaim on the ground that it raises claims arising from two other lawsuits ( Watson and Petersen). Travelers asserts that the proposed amendment will resolve only one-third of the claims and will require it to replead and file additional motions regarding the claims in the Watson and Petersen litigation. In response, Martella has agreed to limit his counterclaim to the current case ( Phillips) and agreed that this court's rulings on the duty to defend issue applies equally to the other two cases ( Watson and Petersen).
Just before oral argument, Travelers withdrew its objection to this motion. However, in response to Travelers' argument that there would be a monetary claim at issue with the addition of the counterclaim proposed by Martella, Martella withdrew this motion pending resolution of the jurisdictional issue. Since that issue is resolved in favor of jurisdiction based on the pleadings when this case was filed, the merits of the motion remain. After reviewing the record, this court concludes that the motion to amend is well-taken.
Martella's Motion for Leave to File Amended Answer and Counterclaim (docket #15) is therefore granted with respect to the Phillips case. The Amended Answer and Counterclaim, and any Reply thereto, will be the only substantive filings permitted during the course of the stay which will be entered in this case.
ORDER
For the reasons stated above, Travelers' Motion for Summary Judgment (docket #5) is DENIED with respect to the duty to defend and DENIED AS PREMATURE with respect to indemnity. Martella's Cross-Motion for Summary Judgment and Motion to Stay Proceedings (docket #9) is GRANTED.
Martella's Motion for Leave to File Amended Answer and Counterclaim (docket #15) is GRANTED. Martella shall file his Amended Answer and Counterclaim within 10 days from the date of this Order, with any Reply due 10 days thereafter.
This action is STAYED. The parties shall submit a written status report to the court every 60 days, with the first such report due on or before September 1, 2004.