American Family Mutual Insurance Company v. Scottsdale Casitas Condominium Association et al

MOTION to Dismiss Case

D. Ariz.August 11, 2016

1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Lawrence A. Peshkin (005169) PESHKIN & KOTALIK, P.C. 3030 North Central Avenue Suite 1106 Phoenix, Arizona 85012 (602) 248-7770 (602) 248-0777 Fax lap@pklawyers.com UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA American Family Mutual Insurance Company, a Wisconsin corporation, Plaintiff, vs. Scottsdale Casitas Condominium Association; AAM L.L.C.; and R&R Property Management, Defendants. No.: CV-16-2289-PHX-GMS RULE 12(b) MOTION TO DISMISS OF DEFENDANT AAM, LLC (Oral argument requested) Pursuant to Rule 12(b), Fed.R.Civ.P., defendant AAM, LLC (“AAM”) requests that the Court dismiss plaintiff’s complaint. This motion is supported by the attached exhibits and following memorandum of points and authorities. I. FACTUAL AND PROCEDURAL BACKGROUND This insurance declaratory judgment action arises from an underlying lawsuit filed by Angela C. Winius (“Winius”) against AAM, R&R Property Management, LLC (“R&R”) and Scottsdale Casitas Condominium Association (“Scottsdale Casitas”) in Maricopa County Superior Court (“the State Court Lawsuit”). In the State Court Lawsuit, Winius alleges several negligence claims against AAM, R&R, and Scottsdale Casitas (collectively referred to as the “State Court Lawsuit Defendants”) relating to the care and maintenance of the Scottsdale Casitas housing community. Winius was a Attorneys for defendant AAM, LLC Case 2:16-cv-02289-GMS Document 15 Filed 08/11/16 Page 1 of 10 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 resident of Scottsdale Casitas. Winius alleges that from June, 2011 to August, 2014 the State Court Lawsuit Defendants were negligent in failing to use reasonable care to remove and clean up pigeon droppings accumulating at Scottsdale Casitas. As a result, Winius allegedly contracted cryptococcal meningitis from exposure to pigeon droppings, soil contaminated with pigeon droppings and/or inhalation of “dry, dusty, aerosolized bird droppings and/or soil particles contaminated with bird droppings.” A copy of the complaint in the State Court Lawsuit is attached as Exhibit 1.1 During the relevant time frame, American Family Mutual Insurance Company (“American Family”) had issued a business policy and umbrella policy (“the Policies”) to Scottsdale Casitas under which AAM and R&R were also insureds. The State Court Lawsuit Defendants tendered defense and indemnity for the State Court Lawsuit to American Family. By letter dated May 12, 2016, American Family advised the State Court Lawsuit Defendants that it was reserving its rights to deny defense and indemnity for the State Court Lawsuit (“the Reservation of Rights Letter”). A copy of American Family’s Reservation of Rights Letter is attached as Exhibit 2.2 Among other things, American Family contended in the Reservation of Rights Letter that coverage was unavailable to the State Court Lawsuit Defendants, referencing the “pollution exclusion” and “fungi or bacteria exclusion” in the Policies. See Exhibit 2 at pp. 2-5. AAM, through undersigned counsel, disputed American Family’s reservation of rights and by letter dated June 30, 2016, AAM was informed that its request that American Family withdraw the reservation of rights was “under consideration.” See the letter dated June 30, 2016 from Lynn M. Allen to Lawrence A. Peshkin, attached as Exhibit 3. 1 This Court may take judicial notice of Exhibit 1 and the state court proceedings as matters of public record having a direct relation to the matters at issue in this case. Fed.R.Evid. 201; United States ex rel. Robinson Rancheria Citizens Council v. Borneo, Inc., 971 F.2d, 244, 248 (9th Cir. 1992). 2 This Court may properly consider evidence outside the pleadings for the purpose of deciding a jurisdictional issue in connection with a motion to dismiss. McCarthy v. United States, 850 F.2d 558, 560 (9th Cir. 1988). Case 2:16-cv-02289-GMS Document 15 Filed 08/11/16 Page 2 of 10 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Approximately two weeks later on July 12, 2016 American Family filed its declaratory judgment complaint in this Court. American Family’s declaratory judgment complaint reiterates the coverage positions outlined in the Reservation of Rights Letter. Although plaintiff has alleged diversity jurisdiction, its complaint does not satisfy Ninth Circuit pleading requirements for such jurisdiction. See Johnson v. Columbia Properties Anchorage, 437 F.3d 894, 899 (9th Cir. 2006) (holding that an LLC is a citizen of every state of which its owners/members are citizens). However, consistent with this Court’s Order dated July 12, 2016, undersigned counsel has conferred with plaintiff’s counsel, Wendy Weigand, on this subject. It is the understanding of AAM’s counsel that none of the owners/members of the two defendant LLCs, AAM and R&R, are citizens of the State of Wisconsin which would mean that diversity jurisdiction still exists. Ms. Weigand has agreed with AAM that plaintiff will file an amended complaint to cure any pleading defect as to the states of citizenship of the owners/members of the LLCs. However, even with the pleading defect properly cured, this Court should still dismiss the complaint for the reasons set forth below. II. THIS COURT HAS BROAD DISCRETION TO REFUSE TO ENTERTAIN AN ACTION UNDER THE FEDERAL DECLARATORY JUDGMENT ACT. Initially, AAM notes that in its complaint American Family seeks a “declaration of its rights and obligations under the Policies” under A.R.S. §12-1832, i.e., Arizona’s Declaratory Judgment Act. Plaintiff misstates the law applicable to this case. More specifically, as the United States District Court for the District of Arizona has affirmed in Mardian Equip. Co. v. St. Paul Fire & Marine Ins. Co., 2006 WL 2456214, at *4 (D.Ariz. 2006), declaratory relief of the nature sought by plaintiff herein will not be governed by Arizona’s Declaratory Judgment Act, but rather, the federal Declaratory Judgment Act: Case 2:16-cv-02289-GMS Document 15 Filed 08/11/16 Page 3 of 10 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 (“The federal, rather than the state, Declaratory Judgment Act controls this litigation, despite the fact that this litigation was brought pursuant to [an] Indiana statute[.]”)) (citing, inter alia, Inst. for Studies Abroad, Inc. v. Int'l Studies Abroad, Inc., 263 F.Supp.2d 1154, 1156 (S.D.Ind.2001); . . . “This is so because under the Erie doctrine, federal courts sitting in diversity apply state substantive law and federal procedural law, and the Act is a procedural statute.” See Id.; Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938); West Publ'g Co. v.. McColgan, 138 F.2d 320, 324 (9th Cir. 1943) (“The Federal Declaratory Judgment Act was not a jurisdiction- conferring statute, but an act to establish a new procedure in the federal courts. . .. ‘Thus, the operation of the Declaratory Judgment Act is procedural only.’”) (citing Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240 (1937)); see also Fischer & Porter Co. v. Moorco Int’l, Inc., 869 F.Supp. 323, 326 (E.D. Pa. 1994) (“Case law indicates that the Act is procedural in nature, and therefore federal law, not state law, governs whether claims may be heard under it.”) (citation omitted); Carlson Holdings, Inc. v. NAFCO Ins. Co., 205 F.Supp.2d 1069, 1074 (D.Minn. 2001) (“[D]eclaratory judgment acts are procedural rules and, thus, in a diversity case, the Federal Declaratory Judgment Act should apply.”) (citing Skelly Oil Co. v. Phillips Petro. Co., 339 U.S. 667, 671 (1950)). The federal Declaratory Judgment Act, codified at 28 U.S.C. §2201, et seq., provides, in pertinent part: 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 a declaration, whether or not further relief is or could be sought. 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.A. §2201 (a) (emphasis added) District courts “possess discretion in determining whether and when to entertain an action under the Declaratory Judgment Act, even when the suit otherwise satisfies subject matter jurisdictional prerequisites.” Wilton v. Seven Falls Co., 515 U.S. 277, 282 (1995); Brillhart v. Excess Ins. Co., 316 U.S. 491, 495 (1942); see also Huth v. Case 2:16-cv-02289-GMS Document 15 Filed 08/11/16 Page 4 of 10 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Hartford Ins. Co., 298 F.3d 800, 802 (9th Cir. 2002). Guidance for the exercise of this discretion is found in Brillhart, supra, and its progeny. In G.E.I.C.O. v. Dizol, 133 F.3d 1220, 1225 (9th Cir. 1998), the Ninth Circuit explained: The Brillhart factors remain the philosophical touchstone for the district court. The district court should avoid needless determination of state law issues; it should discourage litigants from filing declaratory relief actions as a means of forum shopping; and it should avoid duplicative litigation . . . If there are parallel state proceedings involving the same issues and parties pending at the time the federal declaratory action is filed, there is a presumption that the entire suit should be heard in state court . . . The pendency of a state court action does not, of itself, require a district court to refuse federal declaratory relief . . . Nonetheless, federal courts should generally decline to entertain reactive declaratory actions. (emphasis added) III. THIS COURT SHOULD ABSTAIN FROM EXERCISING ITS JURISDICTION TO GRANT DECLARATORY RELIEF UNDER THE CIRCUMSTANCES OF THIS CASE Application of the legal principles outlined above to the circumstances of this case compel the conclusion that this Court should abstain from entertaining American Family’s request for declaratory relief. A. Federal Courts Should Avoid the Needless Determination of State Law Insurance Issues. Federal courts ordinarily should abstain from exercising their jurisdiction in a declaratory judgment action over disputes between insurance companies and their insureds in which the merits must be decided under state law. Polido v. State Farm Mut. Auto. Ins. Co., 110 F.3d 1418, 1423 (9th Cir. 1997), overruled on other grounds, Dizol, supra; Employers Reinsurance v. Karussos, 65 F.3d 796, 798-99 (9th Cir. 1995) (noting that “comity concerns” are particularly weighty in insurance cases which are regulated by state law) overruled, in part, on other grounds, Dizol, supra; Kolstad v. Trinity Universal Ins. Co., 12 F.Supp.2d 1101, 1105 (D. Mont. 1998) (“When Case 2:16-cv-02289-GMS Document 15 Filed 08/11/16 Page 5 of 10 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 considering [the Brillhart] factors in the context of declaratory actions involving insurance issues, the cases generally favor rejecting jurisdiction.”) In this case, American Family’s request for declaratory relief involves interpretation of insurance policies under Arizona law. Insurance law is an area that Congress has expressly left for state regulation. See 15 U.S.C. §§1011-12. There is no discernible reason for this Court to resolve a state law insurance issue under the circumstances of this case. B. Federal Courts Should Discourage Forum Shopping. It would be appropriate for a federal court to refuse to exercise its jurisdiction when, as here, the insurer could have sought declaratory relief in state court. The Ninth Circuit in Polido, supra, concluded: the dispositive question is . . . whether there was a procedural vehicle available to the insurance company in state court to resolve the issues raised in the action filed in federal court. If a state court remedy is available to the insurer, the district court must consider whether circumstances exist that overcome the presumption that the entire suit should be heard in state court . . . Polido, 110 F.3d at 1423. In this case, there is pending litigation in Arizona Superior Court and a procedural vehicle available to American Family in state court to resolve the insurance coverage issues raised in this action. Specifically, American Family could have filed an action under the Arizona Declaratory Judgment statute, A.R.S. §12-1831 et seq. American Family previously has utilized this procedure. E.g., American Family Mut. Ins. Co. v. White, 204 Ariz. 500, 65 P.3d 449 (App. 2003). There are no unique circumstances in this case that would dictate utilization of the federal Declaratory Judgment Act to resolve the insurance coverage issues. Accordingly, abstention would be appropriate. Case 2:16-cv-02289-GMS Document 15 Filed 08/11/16 Page 6 of 10 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 C. Federal Courts Should Avoid Reactive Declaratory Judgment Actions and Duplicative Litigation. As noted in Dizol, supra, federal courts should generally decline to entertain reactive declaratory judgment actions. In American National Fire Ins. Co. v. Hungerford, 53 F.3d 1012 (9th Cir. 1995) overruled on other grounds, Dizol, supra, for example, an insurance company brought an action for declaratory relief in federal court seeking a declaration of non-coverage in a case currently pending against its insured in state court. Id. at 1014. The Ninth Circuit noted that the insurer was not a party to the state court action, and that the federal declaratory relief action presented different legal issues than those in the state court action. The court nonetheless held “that when an ongoing state proceeding involves a state law issue that is predicated on the same factual transaction or occurrence involved in a matter pending before a federal court, the state court is the more suitable forum” for the insurer to bring a related claim. Id. at 1017. In this case, there is an ongoing state proceeding (the State Court Lawsuit) predicated on the same events involved in this declaratory judgment action. American Family apparently filed its declaratory judgment complaint in reaction to the State Court Lawsuit and AAM’s challenge to American Family’s Reservation of Rights Letter. Accordingly, these circumstances support abstention. D. Other Pertinent Factors Dictate Dismissal of this Action. In Dizol, 133 F.3d at 1225 n. 5, the Ninth Circuit identified a non-exhaustive list of other factors that may be considered in deciding whether to exercise jurisdiction, including: (1) whether the declaratory judgment action will settle all aspects of the controversy; (2) whether the declaratory judgment action will serve a useful purpose in clarifying the legal relations at issue; (3) whether the declaratory action is being sought merely for the purposes of procedural fencing or to obtain a res judicata advantage; (4) whether the declaratory judgment action will result in entanglement between the federal Case 2:16-cv-02289-GMS Document 15 Filed 08/11/16 Page 7 of 10 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 and state court systems; (5) the convenience of the parties; and (6) the availability and convenience of other remedies. In this case, analysis of the foregoing additional factors supports dismissal of this action. First, a declaratory action in federal court would not settle all aspects of the controversy because liability and damages issues involving Winius and the State Court Lawsuit Defendants would remain in the State Court Lawsuit. Second, a federal declaratory judgment action would not serve any useful purpose because a declaratory judgment could be easily obtained in state court. Third, allowing this federal declaratory judgment action to proceed would encourage insurance companies to file other routine declaratory judgment actions in federal court rather than to utilize the procedure available under Arizona state law. As previously noted, American Family has utilized the Arizona state procedure in the past and there is no reason other than forum shopping for it to eschew the state court in this case. Fourth, a declaratory judgment action in this Court could lead to entanglement between federal and state courts by giving rise to contradictory legal or factual determinations. In particular, American Family’s coverage defense based on the “fungi or bacteria exclusion,” may depend on the resolution of a factual issue pending in the State Court Lawsuit concerning causation, i.e., the specific etiology of Winius’ cryptococcal meningitis. In addition, the timing and onset of plaintiff’s cryptococcal meningitis allegedly occurring between June, 2011 through August, 2014 are issues in the State Court Lawsuit that could be the subject of inconsistent factual determinations in this declaratory judgment action. Fifth, the convenience of the parties is a neutral factor because both state and federal court presumably would be equally convenient to all parties. Sixth, the Arizona state declaratory judgment procedure is an available and convenient alternative for American Family to pursue. Case 2:16-cv-02289-GMS Document 15 Filed 08/11/16 Page 8 of 10 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 IV. CONCLUSION For the foregoing reasons, defendant AAM respectfully requests that the Court dismiss this action. Dated this 11th day of August, 2016. PESHKIN & KOTALIK, P.C. By: /s/Lawrence A. Peshkin Lawrence A. Peshkin 3030 North Central Avenue, Suite 1106 Phoenix, Arizona 85012 Attorneys for Defendant AAM Case 2:16-cv-02289-GMS Document 15 Filed 08/11/16 Page 9 of 10 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 CERTIFICATE OF SERVICE I HEREBY CERTIFY that on August 11, 2016, I electronically transmitted the attached document to the Clerk’s Office using the ECF System for filing and transmittal of a Notice of Electronic Filing to the following ECF registrants: Craig A. McCarthy Wendy N. Weigand Gust Rosenfeld PLC One East Washington, Ste. 1600 Phoenix, AZ 85004-2553 Attorneys for plaintiff /s/Lawrence A. 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