Encompass Insurance Company v. Callan et al

Filing 37

ORDER by Judge Hamilton denying 32 Motion to Dismiss/Stay; ORDER temporarily staying case for 60 days. (pjhlc1, COURT STAFF) (Filed on 7/2/2012)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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ENCOMPASS INSURANCE CO.,
Plaintiff,

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v.

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ROBERT R. CALLAN, et al.,

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For the Northern District of California

United States District Court

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No. C 11-2821 PJH
ORDER DENYING MOTION TO
DISMISS; ORDER STAYING CASE
FOR 60 DAYS

Defendants.
_______________________________/

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Before the court is defendants’ motion to dismiss or stay this declaratory relief action

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pending resolution of the underlying state court construction defect action as to which

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plaintiff Encompass Insurance Company seeks a determination of coverage in the present

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action.

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The Declaratory Judgment Act, 28 U.S.C. § 2201, confers on federal courts unique

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and substantial discretion in deciding whether to declare the rights of litigants. Wilton v.

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Seven Falls Co., 515 U.S. 277, 286-88 (1995). The district court may decline to exercise

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the remedial power conferred under the Declaratory Judgment Act, even though subject

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matter jurisdiction otherwise exists. Countrywide Home Loans, Inc. v. Mortgage Guar. Ins.

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Corp., 642 F.3d 849, 852-53 (9th Cir. 2011).

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Nevertheless, this discretion is not unlimited. Government Emps. Ins. Co. v. Dizol,

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133 F.3d 1220, 1223 (9th Cir. 1998) (en banc). Guidance on whether to dismiss or stay an

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insurance coverage action pending resolution of an underlying state court action is

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provided by Brillhart v. Excess Insurance Co. of America, 316 U.S. 491 (1942). In Brillhart,

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the Court stated that it would ordinarily be “uneconomical as well as vexatious for a federal

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court to proceed in a declaratory judgment suit where another suit is pending in a state

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court presenting the same issues, not governed by federal law, between the same parties.”

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Id., 316 U.S. at 495.

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Brillhart set forth a nonexhaustive list of factors to be considered in determining

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whether to stay or dismiss a federal court Declaratory Judgment Act case. Among these

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are (1) whether retaining jurisdiction will involve the court in a needless decision of state

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law, (2) whether the request is a means of forum shopping, and (3) whether dismissal of

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the claim for declaratory relief would avoid duplicative litigation. See id. at 494-98; see also

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Smith v. Lenches, 263 F.3d 972, 977 (9th Cir. 2001). The district court must record its

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reasoning on those factors. Dizol, 133 F.3d at 1225. The existence of an action in state
court does not automatically bar a request for federal declaratory relief, and there is no

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For the Northern District of California

United States District Court

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presumption in favor of abstention in declaratory actions generally, nor in insurance

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coverage cases specifically. Id.

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Here, the court finds that neither dismissal nor a stay pending resolution of the

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underlying action are warranted under the Brillhart factors. First, this case is unlikely to

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involve needless determination of state law issues. This factor relates primarily to complex

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determinations of unsettled issues of state law – not to fact-finding in the specific case.

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See Continental Casualty Co. v. Robsac Indus., 947 F.2d 1367, 1371 (9th Cir. 1991),

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overruled on other grounds by Dizol, 133 F.3d at 1226.

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It is true, as defendants argue, that this action presents state-law issues involving

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insurance coverage. However, any determinations of state law in this case will be

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completely separate from those in the underlying liability action, where the plaintiffs have

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asserted causes of action for rescission, products liability, breach of contract, breach of

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warranty, negligence, and misrepresentation. Furthermore, it does not appear that the

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issues in this coverage action are particularly complex or novel.

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Second, there is no evidence of forum-shopping. According to the Ninth Circuit, this

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factor is designed to discourage an insurer from “filing a federal court declaratory action to

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see if it might fare better in federal court at the same time the insurer is engaged in a state

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court action.” American Cas. Co. of Reading, Penn. v. Krieger, 181 F.3d 1113, 1119 (9th
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Cir. 1999). Encompass is not a party to the underlying state court action, and the mere fact

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that Encompass chose to file its declaratory judgment action in federal court, rather than in

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state court, is insufficient to demonstrate forum shopping.

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Third, the present action is not duplicative of the state court case. In the underlying

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action, Briones seeks to hold the Callans and their related entities liable for defects and

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other problems with the home she purchased from them. In the coverage action,

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Encompass seeks a determination of its obligations under the policies it issued the Callans

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– whether the allegations give rise to a duty to defend and indemnify. The state court

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action does not involve Encompass as a party, and also does not involve the issue of
Encompass’ obligations under the policies, as the state court is not being asked to

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For the Northern District of California

United States District Court

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determine whether Encompass has a duty to defend or indemnify the Callans.

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Accordingly, the motion to dismiss/stay is DENIED. The court will, however, stay the

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case for 60 days to allow the parties to complete the upcoming mediation. If the mediation

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does not result in a global settlement, or at a minimum, a settlement of the state court

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action, this case will proceed at the end of the 60-day period.

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The July 11, 2012 hearing date is VACATED.1

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IT IS SO ORDERED.

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Dated: July 2, 2012
______________________________
PHYLLIS J. HAMILTON
United States District Judge

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The court finds this motion appropriate for decision without oral argument. See Civ.

L.R. 7-6.
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