02 Civ. 10338 (SAS)
June 2, 2003.
William T. Corbett, Jr., Esq., Drinker Biddle Reath LLP, for Plaintiff.
Peter A. Antonucci, Esq., Weil, Gotshal Manges LLP; Dean A. Dickie, Esq., Harry N. Arger, Esq. and Gwen M. Geraghty, Esq., Rooks Pitts, for Defendant.
OPINION AND ORDER
National Union Fire Insurance Company of Pittsburgh, Pennsylvania ("National Union") seeks a declaration that it has not breached its contractual obligations to International Wire Group, Inc. ("IWG") and that IWG does not possess a legally cognizable claim for fraud or bad faith. IWG now moves to dismiss the action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, the motion is granted.
Federal jurisdiction is based on diversity of citizenship. IWG is a Delaware corporation with its principal place of business in Missouri and National Union is a Pennsylvania corporation with its principal place of business in New York. See Complaint for Declaratory Relief ("Compl.") ¶¶ 2, 3.
IWG, a subsidiary of Hicks, Muse, Tate Furst, Inc. ("Hicks Muse") assembles washing machine inlet hoses. See National Union Fire Ins. Co. of Pittsburgh, PA v. Hicks, Muse, Tate Furst, Inc., No. 02 Civ. 1334, 2002 WL 1482625, at *1 (S.D.N.Y. Jul. 10, 2002). Since 1986, these hoses have been the subject of a number of product liability suits in which homeowners complain of property damage caused by exploding washing machines. See id.
From 1986 to 2002, IWG received approximately 15,000 claims alleging that the inlet hoses were defective ("hose claims"). See id.
In 1999, Hicks Muse's insurance broker, acting on behalf of Hicks Muse and its affiliates, purchased an umbrella insurance policy from National Union for the period April 1, 2000 through April 1, 2001 ("Policy"). See id. The Policy covered liability in excess of the coverage provided by a primary policy issued by Royal Sunalliance Insurance Company ("Royal Policy"). See id. The Policy followed the same form as the Royal Policy, and thus only covered liability that would have been covered by the Royal Policy but for exhaustion of payment limits under the policy. See id. IWG was among the additional named insureds covered by the Policy. See id. at *2. At some point in 2001, IWG demanded coverage for the hose claims under the Policy. See id.
The Policy was renewed for the period April 1, 2001 through April 1, 2002. Compl. ¶ 17.
B. Procedural History
On January 28, 2002, National Union sued Hicks Muse in the Supreme Court of New York, New York County, seeking a declaration that it has no obligation to indemnify or defend IWG with respect to the hose claims ("New York Action I"). See Complaint in National Union Fire Ins. Co. of Pittsburgh, PA v. Hicks, Muse, Tate Furst, Inc., No. 02600344, Ex. A to Memorandum of Law in Opposition to Defendant IWG's Motion to Dismiss the Complaint for Declaratory Relief ("Pl. Mem."). On February 20, 2002, Hicks Muse removed the action to this Court. See National Union, 2002 WL 1482625 at *1 n. 1. On March 26, 2002, National Union amended its complaint to add IWG as a defendant. See id. at *2.
Shortly after New York Action I was filed, IWG brought suit against National Union in Illinois state court, alleging that National Union had wrongfully denied coverage of the hose claims ("Illinois Action"). See Verified Complaint for Injunctive Relief and Other Damages in International Wire Group, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, et al., No. 02 CH 02470 ("Illinois Complaint"), Ex. A to Compl. Count 1 of the Illinois Complaint seeks injunctive relief. Count 2 seeks declaratory relief regarding National Union's coverage obligations. Counts 3, 4, and 5 allege breach of contract, fraud, and bad faith, respectively.
On September 13, 2002, this Court entered an order staying New York Action I "with respect to all claims and matters pending against defendant International Wire Group, Inc. until . . . a final disposition of the Illinois Action. . . ." 9/13/02 Order in New York Action I ("Stay Order"), Ex. A to Memorandum of Law in Support of Defendant IWG's Motion to Dismiss Complaint ("Def. Mem.").
On January 30, 2003, this Court placed New York Action I on suspense. See 1/30/03 Order in New York Action I.
On October 29, 2002, the Illinois Court ruled that all disputes relating to National Union's excess umbrella policies are governed by Texas law. See Transcript of 10/29/02 Conference in Illinois Action, Ex. B. to Def. Mem., at 3. On October 30, 2002, IWG voluntarily dismissed Counts 3, 4, and 5 of the Illinois Complaint. The following day, IWG sent a letter to National Union advising that IWG intended to bring an action against National Union under Section 21.21 of the Texas Insurance Code for bad faith, fraud, RICO, and other counts based on National Union's treatment of IWG's insurance claims. See 10/31/02 Letter from Daniel J, Weber, Assistant General Counsel for IWG, to Andrew Nadolna of AIG Technical Services ("Notice Letter"), Ex. B to Compl. On December 31, 2002, exactly sixty days after the Notice Letter was sent, National Union filed the instant declaratory action ("New York Action II").
Texas law requires that a notice letter be sent to potential defendants at least sixty days prior to filing a suit seeking damages under Section 21.21. See Tex. Ins. Code Art. 21.21, § 16(e) ("Texas Code"), Ex. C to Def. Mem.
On April 3, 2003, more than three months after New York Action II was filed, IWG filed a complaint in the United States District Court for the Southern District of Texas seeking damages for alleged "unfair insurance settlement practices, insurance bad faith, fraud, defamation, breach of fiduciary duty, and common law negligence" ("Texas Action"). See Complaint in International Wire Group, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, et al., No. G-03-233 ("Texas Complaint") ¶ 1. The Texas Complaint was amended on April 28, 2003 to remove a non-diverse defendant. See 4/28/03 Letter to Court from Mark D. Sheridan, counsel for National Union.
In the Texas Action, IWG complains only about past misconduct; it does not allege continuing misconduct. See 4/3/03 Letter to the Court from Dean A. Dickie, counsel for IWG, at 2.
On May 15, 2003, National Union moved to dismiss the Texas Action pursuant to the "first-to-file" rule or, in the alternative, to transfer the matter to this Court. See 5/16/03 Letter to the Court from Sheridan.
II. LEGAL STANDARD FOR MOTION TO DISMISS
"Given the Federal Rules' simplified standard for pleading, `[a] court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'" Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514 (2002) (emphasis added) (quoting Hishon v. King Spalding, 467 U.S. 69, 73 (1984)). A complaint need not state the legal theory, facts, or elements underlying the claim, except in certain instances. Compare Fed.R.Civ.P. 8 with Fed.R.Civ.P. 9. Pursuant to the simplified pleading standard of Rule 8(a), a complaint need only include "`a short and plain statement of the claim showing that the pleader is entitled to relief.'" Swierkiewicz, 534 U.S. at 512 (quoting Rule 8(a)(2)). A plaintiff need not, in other words, plead the elements of a claim. See In re Initial Public Offering Sec. Litig., 241 F. Supp.2d 281, 323 (S.D.N.Y. 2003) ("Rule 8(a) does not require plaintiffs to plead the legal theory, facts or elements underlying their claim.").
The heightened pleading standard of Rule 9(b) requires that in claims of fraud or mistake "the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b).
When deciding a motion to dismiss pursuant to Rule 12(b)(6), a court must accept all factual allegations in the complaint as true and draw all reasonable inferences in plaintiff's favor. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). Courts may not consider matters outside the pleadings but may consider documents attached to the pleadings, documents referenced in the pleadings, or documents that are integral to the pleadings. See id. at 152-53.
At the motion to dismiss stage, the issue "`is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleading that a recovery is very remote and unlikely but that is not the test.'" Phelps v. Kapnolas, 308 F.3d 180, 184-85 (2d Cir. 2002) (per curiam) (quoting Chance v. Armstrong, 143 F.3d 698, 701 (2d Cir. 1998)). Therefore, the task of the court in ruling on a Rule 12(b)(6) motion is "`merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'" Pierce v. Marano, No. 01 Civ. 3410, 2002 WL 1858772, at *3 (S.D.N.Y. Aug. 13, 2002) (quoting Saunders v. Coughlin, No. 92 Civ. 4289, 1994 WL 98108, at *2 (S.D.N.Y. Mar. 15, 1994)).
A. National Union Did Not Violate this Court's Stay Order
IWG contends that National Union's filing of the Complaint in this action constitutes contempt for this Court's Stay Order and that the appropriate sanction for such "a clear violation" of a court order is dismissal of the action. Def. Mem. at 4-5. IWG is wrong. National Union is not in contempt of this Court's order.
"In order to find that contempt has occurred in a given case, it must be determined that a lawful order of the court, clearly expressing an unequivocal mandate, was in effect." McCormick v. Axelrod, 59 N.Y.2d 574, 583 (1983); see also Perfect Fit Indus. v. ACME Quilting Co., Inc., 646 F.2d 800, 808 (2d Cir. 1981). It must also be demonstrated that the party to be held in contempt knowingly violated that explicit mandate. See Perfect Fit, 646 F.2d at 808 (citing Vuitton et Fils S.A. v. Carousel Handbags, 592 F.2d 126 (2d Cir. 1979)).
While there is no question here that a lawful order of the court was in effect, there has been no violation of that order. The Stay Order provides that the case is stayed with respect to "all claims and matters pending against" IWG. Stay Order (emphasis added). It does not preclude National Union from bringing new claims against IWG. None of the claims in the instant action are "pending" in the original action. Thus, IWG was fully entitled under this Court's Stay Order to bring these additional claims against National Union in a separate action.
The fact that this case was deemed "related" to the original action, see Def. Mem. at 4, is immaterial. The relevant inquiry is whether the claims brought in the second action were "pending" in the first.
B. Declaratory Judgment Is Inappropriate in this Case
IWG argues that this action must be dismissed because declaratory relief is inappropriate when that relief relates only to past actions. See Def. Mem. at 6-8. National Union contends that the action is appropriate because it is designed to clarify the uncertain legal relationship between the parties. See Pl. Mem. at 7.
1. The Declaratory Judgment Act
In actions brought pursuant to the Declaratory Judgment Act ("DJA"), federal courts have "unique and substantial discretion in deciding whether to declare the rights of litigants," Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995), "particularly when there is a pending proceeding in another court, state or federal, that will resolve the controversies between the parties," Great Am. Ins. Co. v. Houston Gen. Ins. Co., 735 F. Supp. 581, 584 (S.D.N.Y. 1990) (citations omitted). Specifically, the statute provides that in a case of "actual controversy" within its jurisdiction, "[a] federal court may declare the rights and other legal relations of any interested party seeking such declaration." 28 U.S.C. § 2201(a) (1994) (emphasis added). The Supreme Court has described the DJA as creating "an opportunity, rather than a duty, to grant a new form of relief." Wilton, 515 U.S. at 288.
The Second Circuit has articulated two criteria to assist district courts in exercising the broad discretion conferred by the DJA: "`(1) when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue; and (2) when it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.'" Continental Cas. Co. v. Coastal Sav. Bank, 977 F.2d 734, 737 (2d Cir. 1992) (quoting Broadview Chem. Corp. v. Loctite Corp., 417 F.2d 998, 1001 (2d Cir. 1969)). "[I]f either of these objectives can be achieved, the action should be entertained. . . ." Broadview, 417 F.2d at 1001. The Court's discretion, however, is not "constricted or guided solely by these criteria." Dow Jones Co., Inc. v. Harrods, Ltd., 237 F. Supp.2d 394, 433 (S.D.N.Y. 2002). Courts "must look at the litigation situation as a whole in determining whether it is appropriate for the Court to exercise jurisdiction over the declaratory action before it." Great Am. Ins., 735 F. Supp. at 585 (citation omitted).
The fundamental purpose of the DJA is to "avoid accrual of avoidable damages to one not certain of his rights and to afford him an early adjudication without waiting until his adversary should see fit to begin suit, after damage has accrued." Luckenbach Steamship Co. v. United States, 312 F.2d 545, 548 (2d Cir. 1963); see also In re Combustible Equip. Assoc., 838 F.2d 35, 37 (2d Cir. 1988) ("The purpose of the [DJA] is to enable parties to adjudicate claims before either side suffers great damages."). A declaratory judgment affords "a party to a ripe legal controversy" the opportunity to have that controversy resolved promptly, without having to wait for the opposing party to exercise its right to sue, "particularly where the delay in seeking judicial intervention will cause substantial prejudice to the declaratory judgment plaintiff." Great Am. Ins., 735 F. Supp. at 585. It is "intended to . . . `settle legal rights and remove uncertainty and insecurity from legal relationships without awaiting a violation of the rights or a disturbance of the relationships.'" Dow Jones, 237 F. Supp.2d at 405 (quoting Beacon Const. Co., Inc. v. Matco Elec. Co., Inc., 521 F.2d 392, 397 (2d Cir. 1975)).
Anticipatory judgments of non-liability are particularly appropriate where there are "claims asserting unaccrued or undefined rights or obligations arising under contractual relations such as insurance and intellectual property." Dow Jones, 237 F. Supp.2d at 426. "However, where the purported use of the DJA seeks a declaration of non-liability to preemptively defeat actions grounded on tort claims involving rights already accrued by reason of alleged wrongful conduct, various courts have held that [such an] application is not a warranted purpose of the DJA." Id. (citing Cunningham Bros., Inc. v. Bail, 407 F.2d 1156, 1167-68 (7th Cir. 1969) and BASF Corp. v. Symington, 50 F.3d 555, 559 (8th Cir. 1995)); see also Sun Oil v. Transcontinental Gas Pipe Line Corp., 108 F. Supp. 280, 282 (E.D.Pa. 1952) (holding that a declaratory action should not be entertained when it is initiated by a prospective or actual defendant in a tort action), aff'd, 203 F.2d 957 (3d Cir. 1953). The reason for this rule is clear: declaratory relief is intended to operate prospectively. There is no basis for declaratory relief where only past acts are involved. See Gianni Sport Ltd. v. Metallica, No. 00 Civ. 0937, 2000 WL 1773511, at *4 (S.D.N.Y. Dec. 4, 2000) (dismissing action seeking declaration of non-liability for past alleged trademark infringement because "any damages that are due have already accrued").
2. Declaratory Judgment Is Unnecessary Because National Union Only Seeks a Declaration of Non-Liability for Past Actions
National Union seeks a declaration of non-liability for allegedly intentional or negligent acts that occurred in the past — namely, fraud and bad faith in the refusal to defend or indemnify IWG in connection with the hose claims. See Compl. ¶ 14 ("This action seeks a determination that National Union has fulfilled all of its obligations to IWG under the excess policies with respect to the [hose claims] and therefore did not breach any of its contractual obligations to IWG, defraud IWG, or deny coverage to IWG in bad faith.") (emphasis added). It does not seek a prospective determination of its rights and responsibilities under the insurance contract (so that it can avoid future damages), but rather a finding that it is not liable for damages alleged to have already accrued. The issue of National Union's present and future obligations to IWG under the contract will be resolved in the Illinois Action. Thus, the instant suit is not necessary to clarify and settle the legal relations of the parties or to afford relief from uncertainty. National Union's interests can be fully adjudicated in either the Illinois or Texas Action.
National Union argues that it is also seeking a declaration with respect to continuing wrongful conduct because IWG intends to challenge both National Union's continuing and past conduct. See Pl. Mem. at 6 (citing Notice Letter). The language in the Notice Letter is unclear as to time-frame, stating only that "IWG will seek damages . . . based on the Defendants' actions in dealing with IWG's insurance claims." Notice Letter. In any event, the Texas Action complains only about past conduct. See supra note 6. Thus, there is no evidence in either complaint that continuing conduct is at issue in these cases.
The fact that IWG seeks clarification of its "rights and obligations vis-a-vis . . . countless other insureds in situations similar to IWG's," Pl. Mem. at 7, does not make declaratory judgment appropriate in this case.
The trial in the Illinois Action has concluded. A bench opinion is expected in the next several weeks. See Transcript of 3/31/03 Conference (stating that Judge Hall promised a ruling on or before June 16, 2003).
3. National Union Filed for Declaratory Judgment in Anticipation of the Texas Action
In addition to falling outside the scope of the DJA's purpose, New York Action II was filed in anticipation of the Texas Action. "[A]pparent anticipation" of litigation is an "equitable consideration" that may "factor in the decision to allow the later filed action to proceed to judgment in the plaintiffs' chosen forum." Factors Etc., Inc. v. Pro Arts, Inc., 579 F.2d 215, 219 (2d Cir. 1978). "Anticipatory conduct" is presumed where the filing of a declaratory judgment action is "triggered by a notice letter." Chicago Ins. Co. v. Holzer, No. 00 Civ. 1062, 2000 WL 777907, at *2 (S.D.N.Y. Jun. 16, 2000) (citing Factors, 579 F.2d at 219); see also Federal Ins. Co. v. May Dep't Stores Co., 808 F. Supp. 347, 350 (S.D.N.Y. 1992) (noting that the filing of an anticipatory declaratory judgment action after notice of a coercive suit has been received leads to an inference of forum shopping).
IWG sent a Notice Letter to National Union on October 31, 2002. The Letter clearly announced IWG's intention to bring suit against National Union under Section 21.21 of the Texas Insurance Code. See Notice Letter. Texas law precluded IWG from actually filing litigation against National Union until at least sixty days after the notice. See Tex. Ins. Code Art. 21.21, § 16(e). With full knowledge of IWG's intent to file suit in Texas, National Union filed the instant action in New York on December 31, 2002 — the first possible day IWG could have filed its action under the Texas Code. Moreover, the language of the Complaint makes clear that New York Action II was filed in direct response to IWG's Notice Letter. See Compl. ¶¶ 13, 14.
Courts in the Second Circuit have repeatedly refused to exercise jurisdiction over declaratory actions motivated by a desire to wrest the choice of forum from the real plaintiff. See, e.g., Factors, 579 F.2d at 219 (refusing to exercise jurisdiction over declaratory judgment action motivated by forum shopping); Chicago Ins. Co., 2000 WL 777907 at *4 ("Precedence is not afforded to a declaratory judgment action filed specifically to gain the home field advantage over an imminent coercive suit.") (internal quotation marks and citation omitted). "The federal declaratory judgment is not a prize to the winner of a race to the courthouses." Perez v. Ledesma, 401 U.S. 82, 119 n. 12 (1971) (Brennan, J. dissenting).
Although IWG waited three months after National Union brought this declaratory action to file its coercive action, this is a classic case of a race to the courthouse. When National Union brought this action in New York, it believed IWG was about to file in Texas. Thus, the instant action was intended to short-circuit the suit eventually brought in Texas. The mere fact that IWG ultimately delayed in filing does not alter National Union's intention. Because National Union used the DJA to "gain a procedural advantage and preempt the forum choice of the plaintiff to the coercive action," Great Am. Ins., 735 F. Supp. 581, 586 (S.D.N.Y. 1990), dismissal is warranted here.
For the foregoing reasons, IWG's motion to dismiss is granted. The Clerk of the Court is directed to close this case.