Cornerstone National Insurance Company v. Itule
Filing
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ORDER that Defendant's Motion to Dismiss (Doc. #12 ) is DENIED. Signed by Judge G Murray Snow on 8/12/2013.(KMG)
Cornerstone National Insurance Company v. Itule
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Doc. 23
WO
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IN THE UNITED STATES DISTRICT COURT
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FOR THE DISTRICT OF ARIZONA
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Cornerstone National Insurance Company,
Plaintiff,
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ORDER
v.
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No. CV-13-00292-PHX-GMS
James Itule,
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Defendant.
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Pending before the Court is Defendant’s Motion to Dismiss, (Doc. 12). For
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reasons specified below, the Court denies the Motion.
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BACKGROUND
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On January 5, 2010, a collision occurred between Barbara Contreras and
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Defendant James Itule after Contreras allegedly failed to stop at a red light. (Doc. 22 at
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2.) Plaintiff Cornerstone National Insurance Company (“Cornerstone”) insured
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Contreras’s vehicle with a policy that limits personal injury liability to $15,000 per
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person. (Id.) Following the collision, Itule sent a conditional demand letter to Cornerstone
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demanding, inter alia, the bodily injury limits of $15,000. (Doc. 12 at 1.) The letter
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further requested documents related to the policy as well as affidavits regarding the assets
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of the driver and nature of her travel. (Id. at 2.) Cornerstone tendered the policy limits but
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did not send the other requested documents. (Id. at 3.) On May 17, 2010, Itule filed suit
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against Contreras in Maricopa County Superior Court to recover damages beyond the
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$15,000 tendered by Cornerstone. (Doc. 22 at 2.) Cornerstone filed an interpleader action
Dockets.Justia.com
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stating that it had tendered the $15,000 policy limits into the court. (Doc. 1 at 4.) It also
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requested the state court to find that Cornerstone did not act in bad faith towards
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Contreras. (Doc. 12 at 6.) The state court declined to rule on the request and consolidated
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the interpleader action with the underlying case on November 23, 2010. (Id. at 4–5.)
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Cornerstone was dismissed without prejudice from the case after it deposited the $15,000
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policy limits with the clerk of the court. (Doc. 1 at 5.)
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After initiation of the suit, Itule and Contreras entered into an Irrevocable
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Settlement Agreement (the “Agreement”) on December 28, 2012, whereby Contreras
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withdrew her answer to Itule’s state court complaint, allowed a default judgment in
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Itule’s favor of $950,000, and assigned any breach of contract or breach of good faith
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claims that Contreras may have against Cornerstone to Itule in exchange for Itule’s
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agreement not to execute the state court judgment against Contreras. (Id. at 3.)
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Cornerstone filed this declaratory judgment action against Itule on January 11, 2013. (Id.)
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Cornerstone requests the Court to declare that (1) Cornerstone met all its duties and
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obligations to Contreras under the policy and (2) Contreras breached the cooperation
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clause of the policy by confessing judgment and entering into the Agreement. (Id. at 7–
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9.) Alternatively, Cornerstone requests a declaration that the stipulated amount of
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$950,000 to settle the underlying injury claim was unreasonable. (Id. at 7.) Cornerstone
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further requests attorneys’ fees and costs. (Id.) Itule now moves to dismiss Cornerstone’s
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Complaint for lack of jurisdiction.
DISCUSSION
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I.
SUBJECT MATTER JURISDICTION
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A.
Legal Standard
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The Court may reach the merits of a dispute only if it has jurisdiction to do so.
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Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 93–95 (1998). Jurisdiction is limited
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to subject matter authorized by the Constitution or by statute. Kokkonen v. Guardian Life
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Ins. Co., 511 U.S. 375, 377 (1994). Federal courts also have diversity jurisdiction over
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cases where the amount in controversy exceeds $75,000 and the parties are citizens of
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different states. See 28 U.S.C. § 1332(a).
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Under Rule 12(b)(1), a defendant may challenge at any time a federal court's
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jurisdiction to hear a case. See Fed. R. Civ. P. 12(b)(1), 12(h)(3). In resolving a motion
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under Rule 12(b)(1), the Court is not limited to the allegations in the pleadings if the
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“jurisdictional issue is separable from the merits of the case.” Roberts v. Corrothers, 812
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F.2d 1173, 1177 (9th Cir. 1987). “The court may view evidence outside the record, and
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no presumptive truthfulness is due to the complaint's allegations that bear on the subject
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matter [jurisdiction] of the court.” See Greene v. United States, 207 F. Supp. 2d 1113,
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1119 (E.D. Cal. 2002) (citing Augustine v. United States, 704 F.2d 1074, 1077 (9th Cir.
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1983)). While lack of subject matter jurisdiction is an affirmative defense, “[t]he party
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asserting jurisdiction has the burden of proving all jurisdictional facts.” Indus. Tectonics,
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Inc. v. Aero Alloy, 912 F.2d 1090, 1092 (9th Cir. 1990) (internal citation omitted).
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B.
Amount in Controversy
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The Parties have stipulated to diversity of citizenship under 28 U.S.C. §
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1332(a)(1). They dispute, however, whether Cornerstone’s claim satisfies the amount in
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controversy requirement. The requirement is satisfied if a plaintiff makes a good faith
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claim that damages exceed $75,000. Crum v. Circus Circus Enters., 231 F.3d 1129, 1131
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(9th Cir. 2000). A good faith claim must be objectively reasonable—if it appears to a
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legal certainty that the claim is for less than the jurisdictional amount it must be
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dismissed. Geographic Expeditions, Inc. v. Estate of Lhotka, 599 F.3d 1102, 1106 (9th
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Cir. 2010) (citing St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 292
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(1938)).
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Cornerstone contends that it brings this action because the settlement amount of
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$950,000 contained in the Agreement exposes it to liability above the jurisdictional
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requirement of $75,000. In challenging jurisdiction, Itule asserts only that “plaintiff’s
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declaratory judgment request asks the Court to limit its indemnification of Contreras to
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$15,000, [so] the Court does not have subject matter jurisdiction.” (Doc. 12 at 5.) But the
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amount in controversy is determined by “the value of the right to be protected or the
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extent of the injury to be prevented,” not by the value of the declaratory relief sought.
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Jackson v. Am. Bar Assoc., 538 F. 2d 829, 831 (9th Cir. 1976). Cornerstone’s claim arises
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from its potential liability to Itule based on the Agreement, and not from the $15,000
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limit on Contreras’s policy with Cornerstone. Itule has not shown to a legal certainty that
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the value of the claim cannot exceed $75,000. Accordingly, the amount in controversy
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satisfies the statutory requirement.
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II.
DECLARATORY JUDGMENT
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A.
Legal Standard
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The Federal Declaratory Judgment Act (“FDJA”) states that “[i]n a case of actual
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controversy within its jurisdiction [with noted exceptions] . . . any court of the United
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States . . . may declare the rights and other legal relations of any interested party seeking
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such declaration, whether or not further relief is or could be sought.” 28 U.S.C. §
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2201(a). The FDJA “created an opportunity, rather than a duty, to grant a new form of
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relief to qualifying litigants.” Wilton v. Seven Falls Co., 515 U.S. 277, 288 (1995). As the
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Ninth Circuit has explained, “The Declaratory Judgment Act was an authorization, not a
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command. It gave the federal courts competence to make a declaration of rights; it did not
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impose a duty to do so.” Amer. Nat. Fire Ins. Co. v. Hungerford, 53 F.3d 1012 (9th Cir.
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1995) (stating that “the Declaratory Judgment Act is ‘deliberately cast in terms of
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permissive, rather than mandatory, authority’”) (internal citation omitted), overruled on
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other grounds by Gov’t. Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1227 (9th Cir.
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1998).
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When determining whether to abstain from an FDJA action, the Ninth Circuit
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considers the factors set out by the Supreme Court in Brillhart v. Excess Insurance
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Company of America, 316 U.S. 491 (1942). “The district court [1] should avoid needless
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determination of state law issues; [2] it should discourage litigants from filing declaratory
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actions as a means of forum shopping; and [3] it should avoid duplicative litigation.”
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Dizol, 133 F.3d at 1225 (“The Brillhart factors remain the philosophical touchstone for
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the district court.”) (internal citation omitted). The Brillhart court explained that
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“[o]rdinarily it would be uneconomical as well as vexatious for a federal court to proceed
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in a declaratory judgment suit where another suit is pending in a state court presenting the
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same issues, not governed by federal law, between the same parties” and that
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“[g]ratuitous interference with the orderly and comprehensive disposition of a state court
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litigation should be avoided.” 316 U.S. at 495.
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The Brillhart factors are not exhaustive, and courts should also consider (1)
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whether the declaratory action will settle all aspects of the controversy; (2) whether the
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action will serve a useful purpose in clarifying the legal relations at issue; (3) whether the
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action is being sought merely for the purposes of procedural fencing or to obtain a “res
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judicata” advantage; (4) whether the use of the action will result in entanglement between
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the federal and state court systems; (5) the convenience to the parties; and (6) the
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availability and relative convenience of other remedies. Dizol, 133 F.3d at 1225 n.5.
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B.
Abstention Factors
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Needless Determination of State Law Issues
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Insurance coverage is fundamentally a question of state law and “federal courts
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should decline to assert jurisdiction in insurance coverage and other declaratory relief
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actions presenting only issues of state law during the pendency of parallel proceedings in
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state court unless there are circumstances present to warrant an exception to that rule.”
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Employers Reinsurance Corp. v. Karussos, 65 F.3d 796, 798–99 (9th Cir. 1995),
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overruled in part on other grounds by Dizol, 133 F.3d at 1227 (internal citation omitted).
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The Ninth Circuit has emphasized the general rule that insurance coverage actions belong
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in state rather than federal court and “the traditional rule that ‘states ha[ve] a free hand in
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regulating the dealings between insurers and their policyholders.’” Karussos, 65 F.3d at
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799 (citing SEC v. National Securities, Inc., 393 U.S. 453, 459 (1969)).
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Cornerstone seeks judgment as to whether Contreras breached the cooperation
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clause of its insurance policy by entering into a settlement agreement with Itule. Further,
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Cornerstone requests a declaration that it “met all its duties and obligations to Contreras
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under the policy.” (Doc. 1 at 7.) Both of these requests involve state law issues. See Ariz.
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Prop. & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 138, 735 P.2d 451, 460 (1987);
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Associated Aviation Underwriters v. Wood, 209 Ariz. 137, 148, 98 P.3d 572, 583 (Ct.
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App. 2004). Thus, a determination in this case could produce results that conflict with the
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state courts’ well-developed treatment of those issues and serve to entangle the two
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systems. This factor favors dismissal.
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2.
Forum Shopping
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The mere act of invoking federal jurisdiction when it is proper does not evince
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forum shopping. See First State Ins. Co. v. Callan Associates, Inc., 113 F.3d 161, 162
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(9th Cir. 1997) (“Although occasionally stigmatized as ‘forum shopping,’ the desire for a
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federal forum is assured by the constitutional provision for diversity jurisdiction and the
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congressional statute implementing Article III.”) Yet jurisdiction for actions brought
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pursuant to the FDJA is discretionary and the Court must decide whether it is proper in
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this case. 28 U.S.C. § 2201(a); Wilton, 515 U.S. at 288.
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The Ninth Circuit has instructed that “federal courts should generally decline to
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entertain reactive declaratory actions.” Dizol, 133 F.3d at 1225. In Continental Casualty
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Co. v. Robsac Industries, an insurer filed a declaratory judgment action in federal court
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“during the pendency of a non-removable state court action presenting the same issues of
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state law.” The court held that the insurer did so merely to obtain “a tactical advantage
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from litigating in a federal forum” and that the “defensive or reactive” nature of the
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insurer’s action warranted dismissal. 947 F.2d 1367, 1371–72 (9th Cir. 1991), overruled
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in part on other grounds by Dizol, 133 F.3d at 1220.
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determination that it met all its duties and obligation to Contreras. In some respects, that
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is similar to the determination Cornerstone requested in its interpleader action. There, it
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requested the state court to find as a matter of law that Cornerstone did not act in bad
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faith towards Contreras. (See Doc. 12 at 6.) The state court declined to make such a
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determination and instead consolidated the interpleader action with the tort action,
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ultimately dismissing Cornerstone from the action without prejudice after it deposited the
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policy limits with the court. Because the state court declined to rule on the merits of the
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In part, Cornerstone requests a
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issue and it is no longer pending in the state action, Cornerstone’s request in this Court
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cannot be construed as forum shopping or reactive. This factor does not favor dismissal.
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3.
Duplicative Litigation
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“If there are parallel state proceedings involving the same issues and parties
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pending at the time the federal declaratory action is filed, there is a presumption that the
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entire suit should be heard in state court.” Dizol, 133 F.3d at 1225 (citing Chamberlain v.
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Allstate Ins. Co., 931 F.2d 1361, 1366-67 (9th Cir. 1991)). The Ninth Circuit has
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interpreted broadly the existence of “parallel state proceedings.” In American National
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Fire Insurance Co. v. Hungerford, the court approved of the holding that a federal action
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parallels a state action if “the ultimate legal determination in each depends upon the same
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facts” and if “there is an alternate state remedy by which the legal determination sought
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in the federal declaratory judgment action may be made on the basis of a well-developed
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factual record.” 53 F.3d 1012, 1017 (9th Cir. 1995), overruled in part on other grounds
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by Dizol, 133 F.3d at 1225 (citing Allstate Ins. Co. v. Mercier, 913 F.2d 273, 278–79 (6th
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Cir. 1990)). That is true even if the pleadings in the federal and state actions present
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different legal issues. Id.
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Cornerstone contends that the issues to be litigated in this declaratory judgment
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are distinct from the issues in state action. Cornerstone primarily relies on Allstate Ins.
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Co. v. Herron in which the Ninth Circuit approved a declaratory judgment granted while
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tort issues arising under the same facts were litigated in state court. 634 F.3d 1101, 1107–
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08 (9th Cir. 2011). Because the declaratory action in Allstate concerned only contractual
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issues, the court found no risk of duplicative litigation. Id. at 1108. Cornerstone’s
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Complaint likewise requests determination based on the insurance policy under facts
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similar to those in Allstate. A state remedy for declaratory relief exists. See A.R.S. § 12-
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1831. But Cornerstone is longer a party to the state action and whether Contreras
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breached the cooperation clause or Cornerstone fulfilled its duties and obligation to
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Contreras are not issues before the state court.
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Itule contends that the state court litigation is ongoing and the issues involved in
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Cornerstone’s complaint could be resolved in that action. Cornerstone, however, requests
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judgment on issues which the state court has declined to rule on and are no longer before
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it. Thus, this factor does not favor dismissal.
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E.
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The additional factors outlined in Dizol for determining whether to exercise
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jurisdiction do not meaningfully impact the jurisdictional analysis. Itule contends that a
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declaratory judgment will not settle all aspects of the controversy because additional
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issues could arise under the Agreement, leading it to seek further damages against
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Contreras. But the risk of “piecemeal” litigation is minimal because although both cases
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arise under the same facts, they present distinct issues. That eliminates the possibility of
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inconsistent legal determinations. Regarding convenience of the parties, both Itule and
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Cornerstone are residents of Arizona and neither party is caused undue hardship by
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appearing in federal court. The Court has subject matter jurisdiction but retains discretion
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whether to exercise jurisdiction. Balancing the Brillhart and Dizol factors, the Court will
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not dismiss Cornerstone’s Complaint.
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Other Factors
IT IS THEREFORE ORDERED that Defendant’s Motion to Dismiss (Doc. 12)
is DENIED.
Dated this 12th day of August, 2013.
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