ORDER GRANTING DEFENDANTS' MOTION TO STAY PROCEEDINGS (Document 32)

SANDRA SNYDER, Magistrate Judge

Defendants Sanders Oldsmobile-Cadillac, Inc., Claude Sanders, Jason Sanders, Smith Chevrolet Co., Inc., and Lawrence T. Smith filed the pending motion to stay these proceedings on April 13, 2007. The matter was heard before the Honorable Sandra M. Snyder, United States Magistrate Judge, on June 8, 2007. Michael J.F. Smith appeared on behalf of the moving Defendants. Chital Patel appeared on behalf of Plaintiff John Deere Insurance Co., now known as Sentry Select Insurance Co. ("Plaintiff").

PROCEDURAL BACKGROUND

Plaintiff filed the instant action for declaratory relief and reimbursement on January 3, 2007, based on this Court's diversity jurisdiction. On January 5, 2007, Plaintiff filed an amended complaint alleging eight causes of action. Plaintiff names the following defendants: Sanders Oldsmobile-Cadillac, Inc., Claude Sanders, Jason Sanders ("Sanders Defendants"); Smith Chevrolet Co., Inc., Lawrence T. Smith ("Smith Defendants"); and Jaime Dominguez, Odilia M. Dominguez, Eli Paz and Sandra L. Yanez ("Dominguez Defendants"), individually and as class representatives in the underlying state court Dominguez action.

On April 9, 2007, the Court set a further scheduling conference for May 29, 2007, due to the recent Fifth District Court of Appeal decision reversing the underlying Dominguez action and the related, anticipated motion practice by the plaintiffs in that action. The May 29, 2007, date has since been continued to August 28, 2007, because of the pending motion to stay.

The instant motion to stay was filed on April 13, 2007. The Sanders Defendants and Smith Defendants move to stay this action based on the reversal of the Dominguez action, which they contend essentially places the action back to the initial pleading stage in the Stanislaus County Superior Court.

Plaintiff filed its opposition on May 21, 2007. Moving Defendants filed their reply on May 24, 2007.

On June 14, 2007, the Court ordered the parties to submit further briefing to address the issues that would be presented to this Court, including necessary discovery, in the event the causes of action relating to the Allen action went forward. The parties submitted their supplemental briefing on June 28 and 29, 2007.

FACTUAL BACKGROUND

The Underlying State Court Actions

Plaintiff issued two errors and omissions policies to Defendant Sanders Oldsmobile. This declaratory relief action arises from three underlying Stanislaus County Superior Court actions in which Plaintiff provided a defense under a reservations of rights: Zavala, et al., v. Sanders Oldsmobile-Cadillac, et al., Allen, et al., v. Sanders-Oldsmobile-Cadillac, et al., and Dominguez, et al., v. Sanders Oldsmobile-Cadillac, et al. Zavala was tried and a defense verdict obtained.

In Allen, Plaintiffs Elizabeth Allen and Keva Williams, on behalf of themselves and as class representatives, filed an action in May 2002, alleging misrepresentations and concealment and omissions of fact about the vehicle they purchased from Sanders. They allege that Sanders failed to disclose that the vehicle at issue was a former rental car. Upon tender of the complaint, Plaintiff provided a defense pursuant to the errors and omissions coverage and subject to a reservation of rights. In April 2004, Plaintiff settled the case and funded the settlement as follows: (1) $265,000 to class members; (2) $105,000 for statutory attorney fees; and (3) $30,000 for class administrative costs. Following settlement, the action was certified as a class action and 209 separate class claims have been approved. Plaintiff has since demanded reimbursement of the $500 deductible per claim, in the total amount of $104,500, from Sanders.

Dominguez was filed in May 2002. The Dominguez Defendants filed suit against Sanders alleging fraud and deceit, as well as other statutory causes of action, with respect to sales of vehicles. Specifically, they alleged that Sanders made misrepresentations at the time of purchase by indicating that they were required to purchase and Extended Service Agreement for $1,495 in order to secure financing from a third-party lender. Upon tender, Plaintiff did not believe that the Dominguez action created a potential for coverage. However, since it was already defending Sanders in the Allen action, it provided a courtesy defense pursuant to the errors and omissions coverage and subject to a reservation of rights. After bifurcation of the legal and equitable claims, a jury returned a special verdict finding that Sanders made false representations of fact to Plaintiffs Paz and Yanez, but that they did not reasonably rely on the representations and sustained no monetary damages. After a bench trial, the court found that Sanders' activity and conduct was predatory under California Business and Professions Code section 17200, et seq., and awarded restitution to vehicle buyers who purchased Extended Service Agreements from Sanders between May 22, 1998, and May 22, 2002.

Five months after the special verdict, California voters passed Proposition 64. On appeal, the Fifth District Court of Appeal reversed the lower court decision in light of Proposition 64 and its affect on standing under California Business and Professions Code section 17200, et seq. Specifically, the court found that Proposition 64, which limits recovery for unfair competition to those who suffered injury in fact, was applicable to the action and therefore deprived plaintiffs of standing. The action has been remanded to the superior court, where counsel is attempting to substitute new plaintiffs.

The Federal Court Action

Plaintiffs' amended complaint alleges eight causes of action. The first four causes of action involve the Allen case: (1) Declaratory relief regarding reimbursement of deductible ($104,500); (2) Breach of contract regarding reimbursement of deductible (for which it requests judgment in the amount of $104,500); (3) Declaratory relief regarding the duty to indemnify; and (4) Reimbursement of settlement money ($265,000). Causes of action five through eight involve the Dominguez action: (5) Declaratory relief regarding the duty to defend; (6) reimbursement of defense fees; (7) Declaratory relief regarding the duty to indemnify; and (8) Declaratory relief regarding how the $500 deductible applies in class action lawsuits. Plaintiff therefore seeks judgment for the deductibles, defense fees and settlement monies paid in the Allen action, as well as judgment for the defense fees in the Dominguez case.

DISCUSSION

Defendants move to stay this action pending resolution of the Dominguez state court action. This, according to Defendants, will avoid factual inconsistencies and advisory opinions. Defendants further contend that a stay will save them from having to defend themselves on two fronts. Defendants also point out that Plaintiff would not be left without a remedy as it can file the claims in state court.

A. Legal Standard

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). In explaining this authority, the Supreme Court stated:

Consistent with the nonobligatory nature of the remedy, 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.

Guidance for the exercise of this discretion is found inBrillhart 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.

B. Analysis

1. Needless Determination of State Law Issues

The parties do not dispute that the bulk of the issues in the amended complaint before this Court involve California law. The action arises out of insurance coverage disputes in the Allen and Dominguez actions and resolution of these issues undoubtedly involves state law. Indeed, whether Defendants are entitled to coverage turns on whether their alleged actions fall under the exclusion provisions of the applicable errors and omissions policy. Traditionally, "states ha[ve] a free hand in regulating the dealings between insurers and their policyholders." SEC v. Nat'l Sec., Inc., 393 U.S. 453, 459 (1969). The California Supreme Court has stated, "[t]o eliminate the risk of inconsistent factual determinations that could prejudice the insured, a stay of the declaratory relief action pending resolution of the third party suit is appropriate when the coverage question turns on facts to be litigated in the underlying action." Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287 (1993).

Plaintiff attempts to avoid this result by arguing that the underlying actions are not parallel coverage actions, but are instead simply tort actions filed by third-party claimants against Defendants. The Ninth Circuit has determined, however, that state court actions not involving the insurance carrier are sufficiently parallel to the declaratory relief action to merit consideration under Brillhart. See Employers Reinsurance Corp. v. Karussos, 65 F.3d 796 (9th Cir. 1995), overruled, in part, on other grounds,Dizol, 133 F.3d 1220 ; Golden Eagle Ins. Co. v. Travelers Cos., 103 F.3d 750 (9th Cir. 1996), overruled, in part, on other grounds, Dizol, 133 F.3d 1220 . The resolution of the issues before this Court turns on factual questions that are intertwined with issues in the underlying actions. In any event, this Court remains entitled to exercise its discretion in determining whether to grant a stay, and the real possibility of inconsistent factual findings weighs in factor of granting a stay. Empire Fire and Marine Ins. Co. v. Rosenbaum, 2007 WL 951699, *4 (E.D. Cal. 2007)

Plaintiff also contends that since the Allen action is final, the related causes of action should go forward in this Court. However, this too may result in needless factual determinations by this Court. Although the Allen action is final, the case was settled without factual findings and discovery will therefore be necessary to resolve the declaratory relief issues. As Defendants have pointed out, there is a great deal of overlap between the Allen and Dominguez actions. Some of the same customers, vehicles and sales personnel are involved, as well as different aspects of many of the same transactions. So, while the Allen action is final, the discovery necessary to resolve the coverage issues is very similar to the discovery in Dominguez, and going forward on Allen would result in a needless waste of judicial resources.

2. Forum Shopping

An inference of forum shopping can be implied from the fact that Plaintiff filed in federal district court despite the opportunity to file in state court. See eg., Empire Fire and Marine, at *4.

Plaintiff suggests that filed in this forum because it needs "preferential declarations and judgments" as it believes Defendants are selling its limited asset pool in an attempt to avoid a potential judgment. While the Court is mindful of this allegation, Plaintiff has not presented the Court with any evidence in support of its belief. Allegations made on information and belief in the First Amended Complaint are not sufficient to warrant a different result.

3. Duplicative Litigation

The final factor also weighs in favor of staying the instant action. As partly explained above, the outcome of the underlying Dominguez action will be dispositive of many of the issues before this Court, i.e., the scope of Plaintiff's duty to defend and indemnify. Moreover, along with the risk of duplicative litigation comes the risk of inconsistent outcomes.

In a related argument, Defendants contend that they should not be forced to litigate on two fronts. The Court agrees. Plaintiff agreed early in the litigation process to represent Defendants under a reservation of rights. Despite its claim that it needs to move forward here to prevent Defendants from making themselves judgment-proof, Plaintiff should not be allowed to force its insured to litigate against their insurer here while simultaneously purporting to represent their interests in Dominguez. The potential for a conflict of interest is great and further weighs in favor of a stay.

Given the uncertain future of the Dominguez action, the Court finds that a stay is preferable to declining jurisdiction. "[W]e note that where the basis for declining to proceed is the pendency of a state proceeding, a stay will often be the preferable course, because it assures that the federal action can proceed without risk of a time bar if the state case, for any reason, fails to resolve the matter in controversy." Wilton, 515 U.S. at 288, n. 2.

Based on the above, the Court therefore GRANTS Defendants' motion to stay the instant action. The parties are directed to file an initial report as to the status of the Dominguez action within thirty (30) days of the date of service of this order.

IT IS SO ORDERED.