Opinion
No. CV-04-665-ST.
August 11, 2004
FINDINGS AND RECOMMENDATION
INTRODUCTION
Plaintiffs, Gordon Powelson and Carol Powelson, ("the Powelsons"), filed a Complaint in the Circuit Court of Multnomah County, Oregon, entitled Powelson, et al, v. St. Paul Fire and Marine Ins. Co., Case No. 0404 03769, seeking a declaration that defendant, St. Paul Fire and Marine Insurance Company ("St. Paul Fire"), breached its contract to insure the Powelsons for liability associated with a building they owned. In a Notice of Removal filed pursuant to 28 U.S.C. § 1441(b) (docket #1), St. Paul Surplus Lines Insurance Company ("St. Paul"), which is the entity that issued the insurance policy and the proper defendant, removed the case to this court based on diversity jurisdiction.
As discussed below, there is a dispute between the parties as to the nature of the claim(s) alleged by the Complaint.
St. Paul's Corporate Disclosure Statement (docket #11) indicates that St. Paul Traveler's Companies, Inc. owns 100% of St. Paul Fire, which in turn owns 100% of St. Paul Specialty Underwriting, Inc., which owns 100% of St. Paul.
The Powelsons have filed a Motion to Remand (docket # 7). For the reasons discussed below, that motion should be granted.
BACKGROUND
The Powelsons leased a building in Multnomah County to Kristi C. Johnson and Melvin R. Cooper ("Johnson and Cooper"). Complaint, ¶ 1. The lease obligated Johnson and Cooper to purchase liability insurance for the building and to name the Powelsons as additional insureds. Id. at ¶ 3. In June 2001, St. Paul issued a policy insuring the Powelsons' building and naming the Powelsons as additional insureds. Id.
Johnson and Cooper established The Onyx Club on the leased premises. Motion to Remove, Exhibit 2A, ¶ 2. They eventually vacated the premises after toxic mold was discovered in the building. Id. at ¶ 11. On October 10, 2003, Johnson and Cooper sued the Powelsons to rescind the lease due to a unilateral or mutual mistake and to obtain restitution of $417,567 expended to remodel the building and buy certain equipment and accessories that were rendered unusable by the toxic mold (the "Johnson/Cooper lawsuit"). Id. at ¶¶ 15 20.
St. Paul included copies of the complaint and summons in two different lawsuits as the second exhibit to its Notice of Removal. For purposes of clarity, this court will refer to the Complaint from the case of Cooper, et. al. v. Powelson, as Exhibit 2A to the Notice of Removal, and the Complaint in Daniels, et. al. v. Dance Club Inc., et. al., as Exhibit 2B to the Notice of Removal.
On December 22, 2003, Kelly Daniels, Taryn Daniels, and Britni Johnson, former employees and visitors of The Onyx Club, filed suit against The Onyx Club, Johnson and Cooper, the Powelsons, and unnamed John Does, alleging that these defendants negligently exposed them to toxic mold (the "Daniels lawsuit"). Motion to Remove, Exhibit 2B, ¶¶ 8, 10, 11. The plaintiffs in the Daniels lawsuit each seek $6 million in damages. Id. at ¶ 14.
The Powelsons provided copies of the Johnson/Cooper and Daniels lawsuits to St. Paul and requested that St. Paul provide defense and indemnity as required by its policy. Complaint, ¶ 7. St. Paul refused, arguing its policy did not cover the suits. Id. at ¶ 8.
On April 6, 2004, the Powelsons filed the Complaint in this case, alleging that St. Paul "breached its promise to perform" the insurance contract, the Powelsons "have suffered damages as a result of that breach, [and] that damage continues," and "the amount of those damages will be proved at trial." Id. at ¶ 9. The Complaint also alleges that the Powelsons "are entitled to their attorney fees under ORS 742.061." Id. at ¶ 11. Finally, the Complaint makes the following demand:
WHEREFORE, Plaintiffs pray judgment against the defendant and in their favor for a declaration the policy covers the claims brought against plaintiffs, for the amount of damage, they have sustained, prejudgment interest at the legal rate upon those amounts, their costs disbursements and attorney fees in prosecuting this claim.Id.
The Powelsons also filed another Complaint on April 6, 2004, against Penn-America Insurance Company (the "Penn-America lawsuit"). Affidavit of Charles C. Erwin (June 4, 2004), ¶ 2. That case, which is still pending in Multnomah County Circuit Court, alleges similar claims for defense and indemnity against Penn-America as alleged against St. Paul. Id. at ¶¶ 2-3. Penn-America insured the Powelsons' building from June 2000 until June 2001, when St. Paul began insuring it. Id. at ¶ 5. According to the Powelsons, Penn-America and St. Paul issued nearly identical policies, and Penn-America has asserted similar defenses to those raised by St. Paul. Id. at ¶¶ 6, 7. Finally, the Powelsons claim that the date for removal of the Penn-America lawsuit to federal court has passed. Id. at ¶ 10.
The Penn-America lawsuit is titled Powelson, et al, vs. Penn-America Ins. Co, Case No. 0404-03770.
Mr. Erwin submitted three different affidavits (dockets #9, 14 and 17). References to the affidavits are identified by the date on which the affidavits were filed.
St. Paul filed a Notice of Removal on May 14, 2004. St. Paul is incorporated in Delaware, with its principal place of business in St. Paul, Minnesota, and the Powelsons are Oregon citizens and residents. Notice of Removal, ¶¶ 4-5. Therefore, St. Paul contends that diversity jurisdiction exists under 28 U.S.C. § 1332(a) because the parties are diverse and the amount in controversy is over $75,000 when the damages sought in the Johnson/Cooper and the Daniels lawsuits are aggregated. Id. at ¶ 8.
DISCUSSION
I. Parties' Arguments
The Powelsons seek to remand this case to state court because the amount in controversy does not exceed $75,000. They argue that the amount in controversy is either $46,430.65, the amount they have spent to date defending the claims in the Johnson/Cooper and Daniels lawsuits, or $61,135.65, the amount they have spent defending the Johnson/Cooper and Daniels lawsuits and pursing this case through the date of oral argument on this motion. Affidavit of Charles C. Erwin (July 14, 2004), ¶¶ 2, 4.
St. Paul responds that the amount in controversy includes the $417,567 sought in the Johnson/Cooper lawsuit, the $6,000,000 demand of each plaintiff in the Daniels lawsuit, and the claims for defense fees and attorneys fees in this case. These aggregate sums far exceed the amount necessary for diversity jurisdiction.
II. Legal Standards
Resolution of this dispute depends on the characterization of the Powelsons' Complaint. If the Powelsons seek only a declaratory judgment under the Declaratory Judgment Act, 28 U.S.C. § 2201(a), to establish that St. Paul must defend and indemnify them in the Johnson/Cooper and Daniels lawsuits, then this court must have an independent basis for federal jurisdiction, such as diversity or federal question jurisdiction.
28 U.S.C. § 2201(a) provides in full:
In a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986, a proceeding under section 505 or 1146 of title 11, or in any civil action involving an antidumping or countervailing duty proceeding regarding a class or kind of merchandise of a free trade area country (as defined in section 516A(f)(10) of the Tariff Act of 1930), as determined by the administering authority, 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, 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.
[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).
Even if the parties are diverse and the amount in controversy exceeds $75,000, a federal court is under no compulsion to exercise jurisdiction over a suit for a declaratory judgment. Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494 (1942). Instead, it may exercise its discretion to retain jurisdiction based on a number of factors (the " Brillhart factors"). Id. at 495.
However, if a complaint alleges not only a declaratory judgment claim, but also some other claim over which the court has subject matter jurisdiction, then the court must accept jurisdiction over the declaratory judgment claim as well.
"We know of no authority for the proposition that an insurer is barred from invoking diversity jurisdiction to bring a declaratory judgment action against an insured on an issue of coverage." Indeed, when other claims are joined with an action for declaratory relief (e.g., bad faith, breach of contract, breach of fiduciary duty, rescission, or claims for other monetary relief), the district court should not, as a general rule, remand or decline to entertain the claim for declaratory relief. If a federal court is required to determine major issues of state law because of the existence of non-discretionary claims, the declaratory action should be retained to avoid piecemeal litigation.Dizol, 133 F.3d at 1225-1226 (citations and footnote omitted).
A claim for monetary relief is independent of a declaratory relief claim "in the sense that it could be litigated in federal court even if no declaratory claim had been filed." United National Ins. Co. v. RD Latex Corp., 242 F.3d 1102, 1113 (9th Cir 2001). In fact, if an insured alleges a claim of bad faith, breach of contract, breach of fiduciary duty, or rescission which provides an independent basis for diversity jurisdiction, then "the district court is without discretion to remand or decline to entertain these causes of action." Dizol, 133 F.3d at 1225 n 6. Consequently, if the Complaint alleges a breach of contract claim based on St. Paul's failure to defend the Johnson/Cooper and Daniels lawsuits over which this court has diversity jurisdiction, then this court must retain the declaratory judgment action. III. Non-Discretionary Jurisdiction
St. Paul argues that this court must exercise jurisdiction over the Complaint because it alleges not only a declaratory judgment claim, but also an independent breach of contract claim that meets the amount-in-controversy requirement for diversity jurisdiction.
This court agrees that the Complaint alleges a breach of contract claim. The Powelsons clearly seek a declaration, as requested in their prayer for relief, that St. Paul provide both a defense and indemnity. However, the Complaint specifically alleges that St. Paul promised to defend the Powelsons from lawsuits regarding their property and that the Powelsons have suffered damages from the breach of that promise. Complaint, ¶¶ 8-9. Those damages are the defense costs which the Powelsons have incurred to date, as well as future defense costs. By alleging that St. Paul has "breached its promise" causing past and continuing damages, id. at ¶ 9, the Powelsons allege a classic breach of contract claim that could be litigated in federal court without being joined to a claim for declaratory relief.
This court does not interpret the Complaint as also alleging a breach of contract claim for indemnity. Paragraph 8 generally alleges that St. Paul "refused to provide plaintiffs any defense or to otherwise perform its agreement to pay any liability which plaintiffs might suffer." The second half of that sentence could refer to indemnity liability. However, paragraph 9 specifically alleges that the Powelsons "were entitled to a defense," that St. Paul "breached its promise to perform the tasks outlined above," and that the Powelsons "have suffered damages as a result of that breach" and "that damage continues." Despite the plural of the word "tasks," only one task has produced any damage to date, and that damage is a result of the alleged breach of the duty to defend. Since no judgment has yet been entered against the Powelsons in either the Johnson/Cooper or Daniels lawsuit, the Powelsons have suffered no damages from any failure to indemnify. Instead of alleging a breach of contract to indemnify, the Powelsons seek a declaration that the policy covers the Johnson/Cooper and Daniels' claims, which will obligate St. Paul to provide indemnity from any liability imposed on the Powelsons in the future as a result of those claims.
Although the Powelsons allege a breach of contract claim based on a failure to defend, that claim does not satisfy the amount-in-controversy necessary for diversity jurisdiction. Because the Complaint does not demand a specific dollar amount, St. Paul only has to show by a preponderance of the evidence that the amount-in-controversy requirement is met. Singer v. State Farm Mut. Auto. Ins. Co, 116 F.3d 373, 376 (9th Cir 1997). Despite this low hurdle, St. Paul has not produced any evidence to rebut the Powelsons' sworn testimony that less than $75,000 has been spent to date defending the Johnson/Cooper and Daniels lawsuits. Moreover, counsel for the Powelsons submitted a supplemental affidavit indicating that on the date this court heard oral arguments on the motion to remand, the total amount-in-controversy in this case, i.e. the amount spent by the Powelsons defending the Johnson/Cooper and Daniels lawsuits and then seeking reimbursement from St. Paul, was $61,135.65, which is $13,864.35 less than the more than $75,000 needed for diversity jurisdiction. Affidavit of Charles Erwin (July 14, 2004), ¶ 4. Plaintiffs also represent that in no event will they request attorney fees which exceed the additional $13,864.35. Id. at ¶ 6.
Accordingly, St. Paul is unable to demonstrate that the Powelsons' breach of contract claim for failure to defend satisfies the amount-in-controversy necessary for diversity jurisdiction. As a result, this court is not required to accept jurisdiction over the Powelsons' declaratory judgment claim.
IV. Discretionary Jurisdiction A. Legal Standards
Because this court does not have diversity jurisdiction over the breach of contract claim, then, as discussed previously, to avoid a remand to state court, this court must have an independent basis for federal jurisdiction over the claim for declaratory relief. But even if the court does have diversity jurisdiction over a declaratory relief claim, "`ordinarily' federal courts 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, 1424 (9th Cir 1997) (quoting and citing Brillhart, 316 US at 495), overruled on other grounds in Dizol, 133 F.3d at 1227.
To depart from this general rule, the Brillhart factors must weigh in favor of retaining jurisdiction. The Ninth Circuit summarized these factors as follows:
The district court should avoid needless determination of state law issues; it should discourage litigants from filing declaratory 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.Dizol, 133 F.3d at 1225 (citations and footnote omitted).
To the Brillhart factors, the Ninth Circuit has added the following factors to consider:
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 6 (citation omitted).
B. Analysis 1. Diversity Jurisdiction
The first question is whether this court has diversity jurisdiction over the declaratory judgment claim. The Powelsons' declaratory judgment claim seeks to establish that the policy covers the Johnson/Cooper and Daniels lawsuits, thereby obligating St. Paul to defend and also indemnify them from any judgment entered against them in either case. When the allegations and demands in the Complaint are considered in full, it is apparent that the amount-in-controversy for this declaratory judgment claim includes the damages sought in both the Johnson/Cooper and Daniels lawsuits. Given that these other lawsuits seek damages that are well-above $75,000, the amount-in-controversy for this declaratory judgment claim is more than adequate to invoke diversity jurisdiction.
2. Application of the Brillhart Factors
The next issue is whether the Brillhart factors favor this court exercising its discretion to retain jurisdiction over this declaratory action.
In this case, the Powelsons seek the answers to questions which turn on the interpretation of state contract law. Specifically, the questions are whether St. Paul should: (1) indemnify the Powelsons if they are found liable in the Johnson/Cooper and Daniels lawsuits; and (2) defend the Powelsons in those suits. This court is not convinced the Powelsons have demonstrated that these questions create a reason to accept jurisdiction.
Here there are a parallel state court proceedings in the form of the Johnson/Cooper and Daniels lawsuits against the Powelsons and the Powelsons' suit against Penn-America. The Ninth Circuit has made it clear that the dispositive question when evaluating whether a pending state proceeding is "parallel" is "whether there was a procedural vehicle available to the insurance company in state court to resolve issues raised in the action filed in federal court." Polido, 110 F.3d at 1423. "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' to prevent forum shopping and piecemeal litigation of complex state issues." Id, quoting Chamberlain, 331 F.2d at 1367. Indeed, even if the insurer is not a party to an underlying state tort action, the Ninth Circuit has explained that:
differences in factual and legal issues between the state and federal court proceedings are not dispositive because the insurer "could have presented the issues that it brought to federal court in a separate action to the same court that will decide the underlying tort action."Id, quoting Karussos, 65 F.3d at 800 (quoting American Nat'l Fire Ins Co. v. Hungerford, 53 F.3d 1012, 1016-17 (9th Cir 1995), overruled on other grounds by Dizol, 53 F.3d at 1227).
Here St. Paul can invoke Oregon's declaratory judgment statute, ORS 28.010 et seq., to present the same issues to the state court deciding the underlying tort actions as are presented here. Keeping this case in federal court would be a waste of judicial resources when the underlying tort actions present an adequate forum in state court. See Hungerford, 53 F.3d at 1018. Moreover, St. Paul has an opportunity in the Penn-American suit to have its arguments addressed in state court since that suit involves nearly the same contractual issues as those raised here. That state court would be a better forum for addressing St. Paul's defenses to coverage.
During oral argument, St. Paul contended that it cannot seek declaratory judgment in state court because it would have to join all the parties to the dispute, including Johnson, Cooper, and Daniels. All the parties with affected interests would have to be joined in a declaratory judgment action filed in state court. Oregon AFSCME (American Federation of State, County and Municipal Employees) Council 75 v. State of Or., Dept. of Admin. Serv., 150 Or. App. 87, 92, 945 P.2d 102, 105 (Or App. 1997) ("The Supreme Court has construed ORS 28.110 to require joinder of all affected interests in order to yield jurisdiction to enter a declaratory judgment"), citing Stanley, Adm. v. Mueller, 211 Or. 198, 202, 315 P.2d 125, 127 (1957) (holding that unless all persons who have an interest which would be affected by the declaration are parties to the proceeding, there is no justiciable controversy). However, the Powelsons indicated at oral argument that they would be willing to add all interested parties to their declaratory judgment action if it is remanded to state court. Moreover, St. Paul could include these parties if it chooses to file its own declaratory action in state court.
A second Brillhart factor, the risk of unnecessarily deciding state law issues, also weighs in favor of declining to exercise jurisdiction. Here two state law issues relating to indemnity may be unnecessarily decided if this court retains jurisdiction. First, the indemnity issue will only ripen if and when the Powelsons are found liable in either the Johnson/Cooper and Daniels lawsuits. This fact would normally weigh against retaining jurisdiction. On the other hand, the parties have advised that an agreement was reached to stay the Johnson/Cooper and Daniels lawsuits pending a decision on what, if anything, is the extent of the Powelsons' insurance coverage. As a result, the underlying state tort actions may not first decide the liability issue that is the root of the indemnity issue at stake in the action before this court. However, this court should not retain jurisdiction simply because some state court has chosen to stay its proceedings pending this court's action. There remains a risk that this court would be issuing an advisory opinion on the indemnity issue if the Powelsons are ultimately found not liable in the Johnson/Cooper and Daniels lawsuits.
Second, the parties represented at oral argument that the Total Pollution Injury or Damage Exclusion Endorsement clause of St. Paul's policy covering the Powelsons' property, which the Powelsons claim is the main source of St. Paul's liability for indemnity (and defense) of the Johnson/Cooper and Daniels's lawsuits, is a type of insurance policy clause that has never been interpreted by an Oregon court. If the Powelsons are ultimately found not liable in the Johnson/Cooper and Daniels lawsuit, it is unnecessary for this court to decide this state law issue of first impression.
A copy of the policy was not submitted for the record.
Finally, two other Brillhart factors militate against accepting jurisdiction. If this court exercises its discretion to review this claim, its ruling will fail to settle all aspects of the controversy and might create entanglement between the federal and state court systems. Specifically, this court's ruling on St. Paul's liability for indemnity and defense will not affect the factual disputes in the Johnson/Cooper and Daniels lawsuits or the contractual disputes in the Penn-America lawsuit. Moreover, if this court rules that St. Paul is liable to defend and indemnify the Powelsons in the Johnson/Cooper and Daniels lawsuits, that ruling may conflict with whatever holding the state court makes on these same issues in the Penn-America lawsuit. One of the fact issues regarding St. Paul's and Penn-American's insurance coverage is when the claims accrued. This court and the state court could reach differing conclusions on that issue which would be difficult to reconcile. This possibility weighs against this court accepting jurisdiction.
Accordingly, after considering all the relevant factors, this court concludes that it would be inappropriate to maintain jurisdiction over this action.
RECOMMENDATION
For the reasons stated above, the Powelsons' Motion for Remand (docket #7) should be GRANTED.
SCHEDULING ORDER
Objections to these Findings and Recommendation, if any, are due August 30, 2004. If no objections are filed, then the Findings and Recommendation will be referred to a district court judge and go under advisement on that date.
If objections are filed, then the response is due within 10 days after being served with a copy of the objections. When the response is due or filed, whichever date is earlier, the Findings and Recommendation(s) will be referred to a district court judge and go under advisement.