Auto-Owners Insurance Company v. Hickory Springs Estates Homeowners Assocation, Inc. et al

Filing 21

ORDER denying 5 Motion to Dismiss Complaint; denying 11 Motion to Dismiss Complaint. Ordered by Judge Hugh Lawson on 12/23/2008. (dhc)

IN THE UNITED STATES DISTRICT COURT F O R THE MIDDLE DISTRICT OF GEORGIA M AC O N DIVISION
AU T O - O W N E R S INSURANCE, C O M P AN Y P l a i nti ff, v. H IC K O R Y SPRINGS ESTATES H O M E O W N E R S ASSOCIATION, IN C ., EDWARD M. BECKHAM, III AN D RICHARD CRAFT D e f e n d a n ts . ______________________________ : : : : : : : : : : : : :

C i v i l Action No. 5:08-CV-049 (HL)

O R D ER
B e fo re the Court are Defendants Hickory Springs Estates Homeowners A s s o c i a ti o n, Inc. and Edward M. Beckham, III's Motion to Dismiss or, in the a l te r na ti v e to stay, Plaintiff's Complaint (Doc. 5). Defendant Richard Craft also fi l e d a separate Motion to Dismiss or, in the alternative, to stay Plaintiff's C o m p l a i nt (Doc. 11). For the following reasons, the Court DENIES Defendants' m o ti o ns . I. B AC K G R O U N D D e fe n d a n t Hickory Springs Estates Homeowners Association ("Hickory S p ring s ") is a neighborhood association organized in conjunction with Hickory

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S p r i ng s Estates located in Macon, Georgia. On March 28, 2006, a dam located i n Hickory Springs Estates and upstream from Defendant Richard Craft ("Craft") fa i le d , allegedly causing damages to Craft's property. Subsequently, on June 15, 2 0 0 , Craft filed a complaint in the Superior Court of Macon County, Georgia a g a i ns t Hickory Springs and Edward M. Beckham ("Beckham"), the President and R e g is tere d Agent of Hickory Springs.1 The complaint filed by Craft in state court a l l e g e s that Hickory Springs failed to implement proper erosion and s e d i m e nta ti o n control measures at the dam. Craft's state court complaint seeks re c o v e ry for damages on the grounds of continuing nuisance, takings under the C o ns ti tutio n of the State of Georgia and under the 5th and 14th Amendments to the U.S. Constitution, trespass and breach of contract. On February 29, 2008, Auto-Owners Insurance Company ("Auto-Owners") b ro ug ht this present action for declaratory judgement pursuant to Rule 57 of the F e d e ra l Rules of Civil Procedure and 28 U.S.C. § 2201, to declare the rights and l e g a l relations with respect to the underlying dispute. Having issued a c o m m e rc i a l general liability insurance policy to Hickory Springs that provided c e r ta i n coverage during the time period of interest, Auto-Owners seeks a

The underlying state action was styled Richard Craft v. Hickory Springs E s ta te s Homeowners Association, Inc., and Edward M. Beckham, III, Civil Action N o . 2007-CV-221. Following a motion to transfer venue, the case was tra ns fe rre d to the Superior Court of Houston County, Georgia, Civil Action No. 2 0 0 8 -V -0 9 1 1 9 1 L , where it is currently pending. 2

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d e c l a ra ti o n that it has no duty to defend or indemnify Hickory Springs or Beckham i n the underlying action.2 After receiving notice of the underlying action, AutoO w ne r s retained counsel to defend Hickory Springs and Beckham and also i s s ue d letters to both in which Auto-Owners provided notice of its reservation of ri g hts to contest coverage under the policy for claims asserted in the underlying a c ti o n. Following this present action, Auto-Owners filed a motion in the underlying s ta te court action seeking to stay the proceedings pending resolution of the i ns ura nc e coverage issues presented in this case.3 The issue of insurance c o v e r a g e is not currently before the Georgia court, but is exclusive to these

In the Complaint (Doc. 1), Auto-Owners relies upon several policy p ro v i s i o ns and exclusions as support for its claim that it owes no duty to defend o r indemnify Hickory Springs and Beckham. Specifically, Auto-Owners asserts a s follows: (1) coverage is precluded by the lack of "property damages" or any o the r covered damages; (2) coverage is precluded by the lack of an "occurrence" a nd any damages were expected from the standpoint of the insured; (3) coverage i s precluded by the exclusion for damages arising out of the discharge, dispersal, s e e p a g e , migration, release or escape of "pollutants" from any location which is o r was owned or occupied by, or rented or loaned to Hickory Springs; (4) c o v e r a g e is precluded by the exclusion for requests that an insured or others test fo r, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way re s p o nd to, or assess the effects of pollutants; and (5) coverage is precluded for a tto rne y fees because the policy affords no coverage for such fees. (Complaint (D o c . 1), ¶¶ 27-43). Auto-Owners was not a named party in the underlying action. AutoO w ne rs therefore moved to intervene in the underlying action should the state c o urt determine Auto-Owners lacks standing to bring the motion to stay the p ro c e e d i ng s . This Court is without knowledge of whether a ruling has been i s s ue d regarding Auto-Owner's motion to stay in the underlying action. 3
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p ro c e e d i ng s . II. D IS C U S S I O N T he Declaratory Judgment Act provides that: "In a case of actual c o n tro v e r s y within its jurisdiction, . . . any court of the United States, upon the fi l i ng of an appropriate pleading, may declare the rights and other legal relations o f any interested party seeking such a determination, whether or not further relief i s or could be sought." 28 U.S.C. § 2201(a) (emphasis added). "Congress limited fe d e ra l jurisdiction under the Declaratory Judgment Act to actual controversies, in s ta tuto ry recognition of the fact that federal judicial power under Article III, S e c ti o n 2 of the United States Constitution extends only to concrete `cases or c o ntro v e rs i e s .'" Atlanta Gas Light Co. v. Aetna Cas. & Sur. Co., 68 F.3d 409, 414 (1 1 th Cir. 1995) (internal citations omitted). Therefore, the threshold question in a d e c l a ra to ry judgement action is whether an "actual controversy" exists. In determining whether an actual controversy exists the Court must analyze "w he the r the facts alleged, under all the circumstances, show that there is a s ub s ta nti a l controversy, between parties having adverse legal interests, of s uffic ie nt immediacy and reality to warrant the issuance of a declaratory j ud g m e nt." Md. Cas. Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941) (c i ti ng Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239-242 (1937)). In regards to insurance disputes specifically, the Supreme Court has ruled that a

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d e te rm i na ti o n of liability against an insured is not a prerequisite for establishing a n actual controversy. Md. Cas Co., 312 U.S. at 273-273; Edwards v. Sharkey, 7 4 7 F.2d 684, 686-87 (11th Cir. 1984); see also Util. Serv. Co., Inc., v. St, Paul T ra v e l e rs Ins. Co., et. al., No. 5:06-CV-207, 2007 W L 188237, at n.5 (M.D. GA. J a n. 22, 2007) ("The Supreme Court has strongly suggested that, for the p urp o s e s of declaratory relief, an `actual controversy' exists between the insured a nd the insurer, even absent a judgment against the insured.") (internal citations o m i tte d ) . And, although the Eleventh Circuit has cautioned against the exercise o f jurisdiction in suits for declaratory judgment when the question of insurance c o v e ra g e may never arise absent a liability determination in the underlying case, E d w a rd s , 747 F.2d at 686 (citing Am. Fid. & Cas. Co. v. Pa. Threserman & F a rm e rs ' Mut. Cas. Co., 280 F.2d 453 (5th Cir. 1960)), issues of substantial c o ntro v e rs y have already manifested in the present case with Auto-Owners c urre ntl y defending the underlying case, which it alleges there is no duty to d e fe nd . See State Farm Fire and Cas. Co. v. Myrick, No. 2:06-CV-359, 2007 W L 3 1 2 0 2 6 2 , at *2 (M.D. Ala. Oct. 23, 2007) ("Courts have recognized a controversy e xi s ts regarding the duty to defend when the insured seeks a defense from an ins ura nce company, but the insurance company denies that it is obligated.") (ci ting Am Fid. & Cas. Co., 280 F.2d at 461).4

Defendants rely on Util. Serv. Co., Inc., for the proposition that a d e c l a ra to ry judgment is not warranted because no determination of liability has 5

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If an actual controversy is present, a federal court has jurisdiction to award d e c l a ra to ry judgment relief. However, the Declaratory Judgment Act has re p e a te d l y been characterized as "an enabling Act, which confers a discretion on the courts rather than an absolute right upon the litigant." W i l to n v. Seven Falls C o ., 515 U.S. 277, 287 (1995) (internal citations and quotations omitted). Accordingly, a district court has substantial discretion in deciding whether to e nte rta i n a declaratory judgment action, even if the action falls within its j uri s d i c ti o n bounds. See id. at 286; see also Am. Fid. & Cas. Co., 280 F.2d at 4 6 1 ("The mandatory obligation of a District Court to accept and determine a suit fo r declaratory relief is not commensurate with the full scope of a `case or c o ntro v e rs y ' within the constitutional sense."). Exercising this discretion to a b s ta i n is of particular importance in cases where a parallel suit is pending in a s ta te court because "it would be uneconomical as well as vexatious for a federal c o urt to proceed in a declaratory judgment suit where another suit is pending in a s ta te court presenting the same issues, not governed by federal law, between the

been rendered in the underlying case. 2007 W L 188237. However, the D e fe nd a nts conveniently choose to ignore salient factual differences between that c a s e and the present case. In Util Serv. Co., Inc., an insured brought a d e c l a ra to ry judgment action against their insurer claiming the insurer had b re a c hed its duty to defend and duty to indemnify in the underlying state court a c ti o n. Id. The district court, however, made clear that the insurer was in fact ful fi l l i ng its duty to defend, thus leaving only the duty to indemnify as an issue. Id. a t 2-3. In contrast to Util Serv. Co., Inc., in this declaratory judgment action the i ns ure rs duty to defend is an issue. 6

s a m e parties." Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 495 (1942). In examining the propriety of abstaining or exercising jurisdiction, the S up re m e Court in Brillhart stated that a district court must ask "whether the q ue s ti o ns in controversy between the parties to the federal suit, and which are not fo re c l o s e d under applicable substantive law, can better be settled in the p ro c e e d i ng pending in the state court." Id. at 495.5 W he n answering that q ue s ti o n, Brillhart added: T his may entail inquiry into scope of the pending state court p ro c e e d i n g and the nature of defenses open there. The federal court m a y have to consider whether the claims of all parties in interest can s a tis fa c to ri l y be adjudicated in that proceeding, whether necessary p a rti e s have been joined, whether such parties are amenable to p ro c e s s in that proceeding, etc. Id. E l a b o ra ti ng upon that guidance, the Eleventh Circuit, in Ameritas Variable L i fe Ins. Co. v. Roach, 411 F.3d 1328 (2005), promulgated a non-exhaustive set o f "guideposts" to be considered, including: (i) the strength of the state's interest i n having the issues raised in the federal declaratory action decided in the state c o urts ; (ii) whether the judgment in the federal declaratory action would settle the c o ntro v e rs y ; (iii) whether the federal declaratory action would serve a useful

The discretionary standard set forth in Brillhart was reaffirmed in W i l to n. W i l to n, 515 U.S. at 227. 7

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p urp o s e in clarifying the legal relations at issue; (iv) whether the declaratory re m e d y is being used merely for the purpose of "procedural fencing"- that is, to p ro v id e an arena for a race for res judicata or to achieve a federal hearing in a c a s e not otherwise removable; (v) whether the use of the declaratory action w o ul d increase the friction between our federal and state courts and improperly e nc ro a c h on state jurisdiction; (vi) whether there is an alternative remedy that is b e tte r or more effective; (vii) whether the underlying factual issues are important to an informed resolution of the case; (viii) whether the state trial court is in a b e tte r position to evaluate those factual issues than is the federal court; and (ix) w he the r there is a close nexus between the underlying factual and legal issues a nd state law and/or public policy, or whether federal common or statutory law d i c ta te s a resolution of the declaratory judgment action. Id. at 1331. As an initial matter, Auto-Owners argues that Brillhart and Ameritus are i na p p l i c a b l e because the underlying state court action is not a "parallel" p ro c e e d i ng . Indeed, in the underlying state court action neither the issue of i ns ura nc e coverage is pending nor is Auto-Owners presently a party. A review of the relevant case law, however, suggests that the discretionary standard provided i n Brillhart and Ameritus is nevertheless applicable under the circumstances, a l b e i t perhaps in a more limited form. On one hand, the Eleventh Circuit has m a d e clear that "[i]t is an abuse of discretion . . . to dismiss a declaratory j ud g m e nt action in favor of a state court proceeding that does not exist." Fed. 8

R e s e rv e Bank of Atlanta v. Thomas, 220 F.3d 1236, 1247 (11th Cir. 2000). On the other hand, abstention is ordinarily warranted in a federal declaratory j ud g m e nt action where there exists an identity of parties and issues in the und e rl y i ng state court action. Ameritus, 411 F.3d at 1330 (citing Brillhart, 316 U .S . at 495). Between that spectrum, in which a related state court action exists b ut is not parallel, the Supreme Court in W i l to n expressly left open the question o f what standard should be applied. 515 U.S. at 290 ("W e do not attempt at this ti m e to delineate the outer boundaries of [the district court's] discretion in other c a s e s , for example . . . cases in which there are no parallel state proceedings."). Moreover, the Eleventh Circuit does not appear to have squarely addressed w he the r the application of the discretionary standard set forth in Brillhart and A m e ritus are dependant upon the existence of a parallel state action. However, o the r circuits have addressed the issue and appear to hold that a "related" state a c ti o n still triggers a limited form of discretion.6 In applying the Ameritus factors to the present case, it is clear that

See Scottsdale Ins. Co. v. Detco Indus., Inc., 426 F.3d 994, 999 (8th Cir. 2 0 0 5 ) ("W e . . . agree that the district court's discretion is limited when no parallel p ro c e e d in g s are pending in state court, because in those circumstances there are l e s s -p re s s i ng interests of practicality and wise judicial administration."); United S ta te s v. City of Las Cruces, 289 F.3d 1170, 1182 (10th Cir. 2002) ("W e now hold the degree of similarity should be considered in the evaluation of the [Brillhart] fac tors , rather than considered as a threshold condition."). Those cases are d i s ti ng ui s ha b l e from those in which no state court action is pending, and to which the Eleventh Circuit in Thomas has seemingly foreclosed a district court's d i s c re ti o n in exercising jurisdiction. 220 F.3d at 1247. 9

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a b s te nti o n is not warranted. The first, second and third factors all weigh in favor o f deciding the declaratory judgment action. Although the insurance policy was i s s ue d in Georgia to citizens of Georgia, Georgia nevertheless has no particular i nte re s t in this federal declaratory judgment action as no Georgia state court has b e e n called upon to decide the sole issue raised­insurance coverage. Additionally, it can not be reasonably disputed that the federal declaratory j ud g m e nt action would not both "settle the controversy" and "serve a useful p urp o s e in clarifying the legal relations" surrounding insurance coverage. Under the fourth factor­whether the declaratory remedy is being used m e re l y for the purpose of "procedural fencing"­Defendants assert that any d e te rm i na ti o ns by this Court would give rise to issues of res judicata in the state c o urt action because "[t]he facts surrounding the failure of the dam and the a l le g e d property damage to the downstream landowner is key to a determination o f liability in the underlying state court action," and those "same facts will be c ri ti c a l to a determination of coverage." (Doc. 5, at 6). However, absent from that c o nc l us o ry statement is any elucidation of which facts, the determination of w hi c h, will necessarily give rise to issues of res judicata in the underlying state c o urt action. Nor do Defendants state how the determination of the facts s urro und i ng the failure of the dam and the alleged property damage to Craft is e v e n implicated in the present declaratory judgement action in the first instance. Morever, under Georgia law, whether there exists a duty to defend is determined 10

b y comparing the language of the insurance contract with the allegations of the c o m p l a i nt. Penn-America Ins. Co. v. Disabled Am. Veterans, Inc., 268 Ga. 564, 5 6 5 , 490 S.E.2d 374, 376 (1997); accord Great Am. Ins. Co., v. McKemie, 244 G a . 84, 85, 259 S.E.2d 39, 40-41 (1979). Therefore, because Auto-Owner's duty to defend can be analyzed without making factual determinations, Defendants' p o s i ti o n that factual determinations of this Court will have res judicata effect on the state court action is hardly tenable.7 T he fifth and sixth factors similarly support a conclusion that this Court s ho ul d retain jurisdiction over the federal declaratory action. The issue of i ns ura nc e coverage is not currently pending in the underlying state court action, thus obviating concerns of federalism, comity or gratuitous interference with state c o urt proceedings. Similarly, delaying the issue of Auto-Owner's duty to defend unti l a determination of liability is made in the underlying suit is no more an e ffic i e nt alternative and would not prevent piecemeal litigation; upon motion, the s ta te court could entertain the duty to defend issue either currently, by staying the und e rl y i ng proceedings and hearing the issue separately, or after a determination o f liability is made. Under any of the alternatives, whether the issue is decided in the underlying action or in the present action, the litigation would piecemeal, thus

As is discussed, infra, the Plaintiff's duty to indemnify will not be c o ns i d e re d until after either a final disposition of the underlying state court action o r a ruling on the duty to defend. 11

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c o ns i d e ra ti o ns of judicial economy do not favor abstention. W i th respect to the seventh and eighth factors, the underlying factual i s s ue s are not important to an informed resolution of this case. As discussed e a r l i e r , an insurer's duty to defend a lawsuit brought against its insured is d e te rm i ne d by comparing the language of the insurance contract to the a l l e g a ti o ns set forth in the complaint, regardless of the truth of falsity of such a l l e g a ti o ns . Penn-America Ins. Co., 268 Ga. at 565, 490 S.E.2d at 376. Likewise, should the issue of Auto-Owner's duty to indemnify even need to be d e c i d e d , Defendants have made no specific showing of any overlapping issues of fa c t or law that would arise in the two cases. Finally, under the ninth factor, although the issues of insurance coverage ra i s e d in this action must be decided in accordance with state law, they are not c urre ntl y pending in the state court action. Consequently, this factor does not fa v o r abstention. In sum, application of the nine Ameritus factors counsels strongly in favor o f retaining jurisdiction over this declaratory judgment action. To dismiss or stay thi s action in its entirety would deny Auto-Owners prompt resolution of the actual c o ntro v e rs y surrounding insurance coverage, especially its duty to defend, and w o ul d not promote the objectives of federalism, efficiency, and comity that und e rl i e the Federal Declaratory Judgment Act and Brillhart/W i l to n doctrine. This Court's determination that Auto-Owner's present duty to defend claim 12

m a y go forward leaves unresolved the present duty to indemnify claim. A d e te rm i na ti o n of liability in the underlying state court action could moot that issue i n this action. Therefore, discretion and common sense dictates the following a p p ro a c h, which has been adopted by other District Courts within this Circuit. See Atlantic Cas. Ins. Co., 2007 W L 4335499, at *5-6; Smithers Construction, Inc. v . Bituminous Cas. Corp., 563 F.Supp.2d 1345, 1349 (S.D. Fla. 2008). This a c ti o n will proceed to final ruling on the duty to defend issue. The duty to i nd e m ni fy issue will not be considered until the earlier of (a) a final disposition of the underlying state court action; or (b) a ruling on the duty to defend. III. C O N C L U S IO N F o r all of the foregoing reasons, the Defendants Hickory Springs Estates H o m e o w ne r s Association, Inc. and Edward M. Beckham, III's Motion to Dismiss o r, in the alternative to stay, Plaintiff's Complaint (Doc. 5), as well as Defendant R i c ha rd Craft's Motion to Dismiss or, in the alternative, to stay Plaintiff's C o m p l a i nt (Doc. 11), are DENIED.

S O ORDERED, this the

23rd

day of December, 2008.

s /H ug h Lawson HUGH LAWSON, JUDGE w jc

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