Cornerstone National Insurance Company v. Itule

Filing 23

ORDER that Defendant's Motion to Dismiss (Doc. #12 ) is DENIED. Signed by Judge G Murray Snow on 8/12/2013.(KMG)

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Cornerstone National Insurance Company v. Itule 1 Doc. 23 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Cornerstone National Insurance Company, Plaintiff, 10 11 ORDER v. 12 No. CV-13-00292-PHX-GMS James Itule, 13 Defendant. 14 15 Pending before the Court is Defendant’s Motion to Dismiss, (Doc. 12). For 16 reasons specified below, the Court denies the Motion. 17 BACKGROUND 18 On January 5, 2010, a collision occurred between Barbara Contreras and 19 Defendant James Itule after Contreras allegedly failed to stop at a red light. (Doc. 22 at 20 2.) Plaintiff Cornerstone National Insurance Company (“Cornerstone”) insured 21 Contreras’s vehicle with a policy that limits personal injury liability to $15,000 per 22 person. (Id.) Following the collision, Itule sent a conditional demand letter to Cornerstone 23 demanding, inter alia, the bodily injury limits of $15,000. (Doc. 12 at 1.) The letter 24 further requested documents related to the policy as well as affidavits regarding the assets 25 of the driver and nature of her travel. (Id. at 2.) Cornerstone tendered the policy limits but 26 did not send the other requested documents. (Id. at 3.) On May 17, 2010, Itule filed suit 27 against Contreras in Maricopa County Superior Court to recover damages beyond the 28 $15,000 tendered by Cornerstone. (Doc. 22 at 2.) Cornerstone filed an interpleader action 1 stating that it had tendered the $15,000 policy limits into the court. (Doc. 1 at 4.) It also 2 requested the state court to find that Cornerstone did not act in bad faith towards 3 Contreras. (Doc. 12 at 6.) The state court declined to rule on the request and consolidated 4 the interpleader action with the underlying case on November 23, 2010. (Id. at 4–5.) 5 Cornerstone was dismissed without prejudice from the case after it deposited the $15,000 6 policy limits with the clerk of the court. (Doc. 1 at 5.) 7 After initiation of the suit, Itule and Contreras entered into an Irrevocable 8 Settlement Agreement (the “Agreement”) on December 28, 2012, whereby Contreras 9 withdrew her answer to Itule’s state court complaint, allowed a default judgment in 10 Itule’s favor of $950,000, and assigned any breach of contract or breach of good faith 11 claims that Contreras may have against Cornerstone to Itule in exchange for Itule’s 12 agreement not to execute the state court judgment against Contreras. (Id. at 3.) 13 Cornerstone filed this declaratory judgment action against Itule on January 11, 2013. (Id.) 14 Cornerstone requests the Court to declare that (1) Cornerstone met all its duties and 15 obligations to Contreras under the policy and (2) Contreras breached the cooperation 16 clause of the policy by confessing judgment and entering into the Agreement. (Id. at 7– 17 9.) Alternatively, Cornerstone requests a declaration that the stipulated amount of 18 $950,000 to settle the underlying injury claim was unreasonable. (Id. at 7.) Cornerstone 19 further requests attorneys’ fees and costs. (Id.) Itule now moves to dismiss Cornerstone’s 20 Complaint for lack of jurisdiction. DISCUSSION 21 22 I. SUBJECT MATTER JURISDICTION 23 A. Legal Standard 24 The Court may reach the merits of a dispute only if it has jurisdiction to do so. 25 Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 93–95 (1998). Jurisdiction is limited 26 to subject matter authorized by the Constitution or by statute. Kokkonen v. Guardian Life 27 Ins. Co., 511 U.S. 375, 377 (1994). Federal courts also have diversity jurisdiction over 28 cases where the amount in controversy exceeds $75,000 and the parties are citizens of -2- 1 different states. See 28 U.S.C. § 1332(a). 2 Under Rule 12(b)(1), a defendant may challenge at any time a federal court's 3 jurisdiction to hear a case. See Fed. R. Civ. P. 12(b)(1), 12(h)(3). In resolving a motion 4 under Rule 12(b)(1), the Court is not limited to the allegations in the pleadings if the 5 “jurisdictional issue is separable from the merits of the case.” Roberts v. Corrothers, 812 6 F.2d 1173, 1177 (9th Cir. 1987). “The court may view evidence outside the record, and 7 no presumptive truthfulness is due to the complaint's allegations that bear on the subject 8 matter [jurisdiction] of the court.” See Greene v. United States, 207 F. Supp. 2d 1113, 9 1119 (E.D. Cal. 2002) (citing Augustine v. United States, 704 F.2d 1074, 1077 (9th Cir. 10 1983)). While lack of subject matter jurisdiction is an affirmative defense, “[t]he party 11 asserting jurisdiction has the burden of proving all jurisdictional facts.” Indus. Tectonics, 12 Inc. v. Aero Alloy, 912 F.2d 1090, 1092 (9th Cir. 1990) (internal citation omitted). 13 B. Amount in Controversy 14 The Parties have stipulated to diversity of citizenship under 28 U.S.C. § 15 1332(a)(1). They dispute, however, whether Cornerstone’s claim satisfies the amount in 16 controversy requirement. The requirement is satisfied if a plaintiff makes a good faith 17 claim that damages exceed $75,000. Crum v. Circus Circus Enters., 231 F.3d 1129, 1131 18 (9th Cir. 2000). A good faith claim must be objectively reasonable—if it appears to a 19 legal certainty that the claim is for less than the jurisdictional amount it must be 20 dismissed. Geographic Expeditions, Inc. v. Estate of Lhotka, 599 F.3d 1102, 1106 (9th 21 Cir. 2010) (citing St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 292 22 (1938)). 23 Cornerstone contends that it brings this action because the settlement amount of 24 $950,000 contained in the Agreement exposes it to liability above the jurisdictional 25 requirement of $75,000. In challenging jurisdiction, Itule asserts only that “plaintiff’s 26 declaratory judgment request asks the Court to limit its indemnification of Contreras to 27 $15,000, [so] the Court does not have subject matter jurisdiction.” (Doc. 12 at 5.) But the 28 amount in controversy is determined by “the value of the right to be protected or the -3- 1 extent of the injury to be prevented,” not by the value of the declaratory relief sought. 2 Jackson v. Am. Bar Assoc., 538 F. 2d 829, 831 (9th Cir. 1976). Cornerstone’s claim arises 3 from its potential liability to Itule based on the Agreement, and not from the $15,000 4 limit on Contreras’s policy with Cornerstone. Itule has not shown to a legal certainty that 5 the value of the claim cannot exceed $75,000. Accordingly, the amount in controversy 6 satisfies the statutory requirement. 7 II. DECLARATORY JUDGMENT 8 A. Legal Standard 9 The Federal Declaratory Judgment Act (“FDJA”) states that “[i]n a case of actual 10 controversy within its jurisdiction [with noted exceptions] . . . any court of the United 11 States . . . may declare the rights and other legal relations of any interested party seeking 12 such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 13 2201(a). The FDJA “created an opportunity, rather than a duty, to grant a new form of 14 relief to qualifying litigants.” Wilton v. Seven Falls Co., 515 U.S. 277, 288 (1995). As the 15 Ninth Circuit has explained, “The Declaratory Judgment Act was an authorization, not a 16 command. It gave the federal courts competence to make a declaration of rights; it did not 17 impose a duty to do so.” Amer. Nat. Fire Ins. Co. v. Hungerford, 53 F.3d 1012 (9th Cir. 18 1995) (stating that “the Declaratory Judgment Act is ‘deliberately cast in terms of 19 permissive, rather than mandatory, authority’”) (internal citation omitted), overruled on 20 other grounds by Gov’t. Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1227 (9th Cir. 21 1998). 22 When determining whether to abstain from an FDJA action, the Ninth Circuit 23 considers the factors set out by the Supreme Court in Brillhart v. Excess Insurance 24 Company of America, 316 U.S. 491 (1942). “The district court [1] should avoid needless 25 determination of state law issues; [2] it should discourage litigants from filing declaratory 26 actions as a means of forum shopping; and [3] it should avoid duplicative litigation.” 27 Dizol, 133 F.3d at 1225 (“The Brillhart factors remain the philosophical touchstone for 28 the district court.”) (internal citation omitted). The Brillhart court explained that -4- 1 “[o]rdinarily it would be uneconomical as well as vexatious for a federal court to proceed 2 in a declaratory judgment suit where another suit is pending in a state court presenting the 3 same issues, not governed by federal law, between the same parties” and that 4 “[g]ratuitous interference with the orderly and comprehensive disposition of a state court 5 litigation should be avoided.” 316 U.S. at 495. 6 The Brillhart factors are not exhaustive, and courts should also consider (1) 7 whether the declaratory action will settle all aspects of the controversy; (2) whether the 8 action will serve a useful purpose in clarifying the legal relations at issue; (3) whether the 9 action is being sought merely for the purposes of procedural fencing or to obtain a “res 10 judicata” advantage; (4) whether the use of the action will result in entanglement between 11 the federal and state court systems; (5) the convenience to the parties; and (6) the 12 availability and relative convenience of other remedies. Dizol, 133 F.3d at 1225 n.5. 13 14 B. Abstention Factors 1. Needless Determination of State Law Issues 15 Insurance coverage is fundamentally a question of state law and “federal courts 16 should decline to assert jurisdiction in insurance coverage and other declaratory relief 17 actions presenting only issues of state law during the pendency of parallel proceedings in 18 state court unless there are circumstances present to warrant an exception to that rule.” 19 Employers Reinsurance Corp. v. Karussos, 65 F.3d 796, 798–99 (9th Cir. 1995), 20 overruled in part on other grounds by Dizol, 133 F.3d at 1227 (internal citation omitted). 21 The Ninth Circuit has emphasized the general rule that insurance coverage actions belong 22 in state rather than federal court and “the traditional rule that ‘states ha[ve] a free hand in 23 regulating the dealings between insurers and their policyholders.’” Karussos, 65 F.3d at 24 799 (citing SEC v. National Securities, Inc., 393 U.S. 453, 459 (1969)). 25 Cornerstone seeks judgment as to whether Contreras breached the cooperation 26 clause of its insurance policy by entering into a settlement agreement with Itule. Further, 27 Cornerstone requests a declaration that it “met all its duties and obligations to Contreras 28 under the policy.” (Doc. 1 at 7.) Both of these requests involve state law issues. See Ariz. -5- 1 Prop. & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 138, 735 P.2d 451, 460 (1987); 2 Associated Aviation Underwriters v. Wood, 209 Ariz. 137, 148, 98 P.3d 572, 583 (Ct. 3 App. 2004). Thus, a determination in this case could produce results that conflict with the 4 state courts’ well-developed treatment of those issues and serve to entangle the two 5 systems. This factor favors dismissal. 6 2. Forum Shopping 7 The mere act of invoking federal jurisdiction when it is proper does not evince 8 forum shopping. See First State Ins. Co. v. Callan Associates, Inc., 113 F.3d 161, 162 9 (9th Cir. 1997) (“Although occasionally stigmatized as ‘forum shopping,’ the desire for a 10 federal forum is assured by the constitutional provision for diversity jurisdiction and the 11 congressional statute implementing Article III.”) Yet jurisdiction for actions brought 12 pursuant to the FDJA is discretionary and the Court must decide whether it is proper in 13 this case. 28 U.S.C. § 2201(a); Wilton, 515 U.S. at 288. 14 The Ninth Circuit has instructed that “federal courts should generally decline to 15 entertain reactive declaratory actions.” Dizol, 133 F.3d at 1225. In Continental Casualty 16 Co. v. Robsac Industries, an insurer filed a declaratory judgment action in federal court 17 “during the pendency of a non-removable state court action presenting the same issues of 18 state law.” The court held that the insurer did so merely to obtain “a tactical advantage 19 from litigating in a federal forum” and that the “defensive or reactive” nature of the 20 insurer’s action warranted dismissal. 947 F.2d 1367, 1371–72 (9th Cir. 1991), overruled 21 in part on other grounds by Dizol, 133 F.3d at 1220. 22 determination that it met all its duties and obligation to Contreras. In some respects, that 23 is similar to the determination Cornerstone requested in its interpleader action. There, it 24 requested the state court to find as a matter of law that Cornerstone did not act in bad 25 faith towards Contreras. (See Doc. 12 at 6.) The state court declined to make such a 26 determination and instead consolidated the interpleader action with the tort action, 27 ultimately dismissing Cornerstone from the action without prejudice after it deposited the 28 policy limits with the court. Because the state court declined to rule on the merits of the -6- In part, Cornerstone requests a 1 issue and it is no longer pending in the state action, Cornerstone’s request in this Court 2 cannot be construed as forum shopping or reactive. This factor does not favor dismissal. 3 3. Duplicative Litigation 4 “If there are parallel state proceedings involving the same issues and parties 5 pending at the time the federal declaratory action is filed, there is a presumption that the 6 entire suit should be heard in state court.” Dizol, 133 F.3d at 1225 (citing Chamberlain v. 7 Allstate Ins. Co., 931 F.2d 1361, 1366-67 (9th Cir. 1991)). The Ninth Circuit has 8 interpreted broadly the existence of “parallel state proceedings.” In American National 9 Fire Insurance Co. v. Hungerford, the court approved of the holding that a federal action 10 parallels a state action if “the ultimate legal determination in each depends upon the same 11 facts” and if “there is an alternate state remedy by which the legal determination sought 12 in the federal declaratory judgment action may be made on the basis of a well-developed 13 factual record.” 53 F.3d 1012, 1017 (9th Cir. 1995), overruled in part on other grounds 14 by Dizol, 133 F.3d at 1225 (citing Allstate Ins. Co. v. Mercier, 913 F.2d 273, 278–79 (6th 15 Cir. 1990)). That is true even if the pleadings in the federal and state actions present 16 different legal issues. Id. 17 Cornerstone contends that the issues to be litigated in this declaratory judgment 18 are distinct from the issues in state action. Cornerstone primarily relies on Allstate Ins. 19 Co. v. Herron in which the Ninth Circuit approved a declaratory judgment granted while 20 tort issues arising under the same facts were litigated in state court. 634 F.3d 1101, 1107– 21 08 (9th Cir. 2011). Because the declaratory action in Allstate concerned only contractual 22 issues, the court found no risk of duplicative litigation. Id. at 1108. Cornerstone’s 23 Complaint likewise requests determination based on the insurance policy under facts 24 similar to those in Allstate. A state remedy for declaratory relief exists. See A.R.S. § 12- 25 1831. But Cornerstone is longer a party to the state action and whether Contreras 26 breached the cooperation clause or Cornerstone fulfilled its duties and obligation to 27 Contreras are not issues before the state court. 28 Itule contends that the state court litigation is ongoing and the issues involved in -7- 1 Cornerstone’s complaint could be resolved in that action. Cornerstone, however, requests 2 judgment on issues which the state court has declined to rule on and are no longer before 3 it. Thus, this factor does not favor dismissal. 4 E. 5 The additional factors outlined in Dizol for determining whether to exercise 6 jurisdiction do not meaningfully impact the jurisdictional analysis. Itule contends that a 7 declaratory judgment will not settle all aspects of the controversy because additional 8 issues could arise under the Agreement, leading it to seek further damages against 9 Contreras. But the risk of “piecemeal” litigation is minimal because although both cases 10 arise under the same facts, they present distinct issues. That eliminates the possibility of 11 inconsistent legal determinations. Regarding convenience of the parties, both Itule and 12 Cornerstone are residents of Arizona and neither party is caused undue hardship by 13 appearing in federal court. The Court has subject matter jurisdiction but retains discretion 14 whether to exercise jurisdiction. Balancing the Brillhart and Dizol factors, the Court will 15 not dismiss Cornerstone’s Complaint. 16 17 18 Other Factors IT IS THEREFORE ORDERED that Defendant’s Motion to Dismiss (Doc. 12) is DENIED. Dated this 12th day of August, 2013. 19 20 21 22 23 24 25 26 27 28 -8-

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