B.D. Properties Hawaii, LLC et al vs. Axis Surplus

Filing 20

FINDINGS AND RECOMMENDATION to Grant 8 Plaintiff's MOTION to Remand Case to Second Circuit Court, State of Hawaii. Signed by Judge BARRY M. KURREN on 2/1/2014. (gab, )CERTIFICATE OF SERVICEParticipants regist ered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
B.D. PROPERTIES HAWAII, LLC, )
)
Plaintiff,
)
)
vs.
)
)
AXIS SURPLUS INSURANCE
)
COMPANY,
)
)
Defendant.
)
______________________________ )

Civ. No. 13-00619 ACK-BMK
FINDINGS AND
RECOMMENDATION TO GRANT
PLAINTIFF’S MOTION TO
REMAND THE CASE TO
SECOND CIRCUIT COURT,
STATE OF HAWAII

FINDINGS AND RECOMMENDATION TO GRANT
PLAINTIFF’S MOTION TO REMAND THE CASE TO
SECOND CIRCUIT COURT, STATE OF HAWAII
Before the Court is Plaintiff B.D. Properties Hawaii, LLC’s Motion to
Remand the Case to Second Circuit Court, State of Hawaii (Doc. 8.) The Court
heard this Motion on January 30, 2014. After careful consideration of the Motion
and the supporting and opposing memoranda, the Court finds and recommends that
Plaintiff’s Motion be GRANTED.
BACKGROUND
This case arises from Defendant Axis Surplus Insurance Company’s
denial of Plaintiff’s demand that it defend and indemnify Plaintiff in an underlying
state court action.

On March 16, 2010, Robert Jay and Joanne Applegate (“the
Applegates”) filed the underlying state court action against Plaintiff, Gregory E.
Brown, Robert H. Dein, and All Islands, Inc. (collectively, “the State Court
Defendants”) in the Second Circuit Court of the State of Hawaii. (Underlying
Complaint at 1.) The Applegates alleged that Brown purchased property on Maui
and thereafter developed it by constructing a single family residence. (Id.
¶¶ 10-11.) In 2007, the State Court Defendants listed the property for sale.
In February 2008, the Applegates offered to purchase the property for
$5,000,000, and Brown accepted. (Id. ¶¶ 15-16.) After the sale closed on May 29,
2008, the Applegates discovered numerous defects with the property and that
Brown’s disclosures and representations in the Disclosure Statement were false and
misleading. (Id. ¶¶ 17, 21.) When the Applegates moved into the property, “they
found the house filthy, riddled with defects, and with the grounds overgrown.” (Id.
¶ 25.)
The Applegates sued the State Court Defendants on March 16, 2010,
asserting that they failed to disclose defects that were known or should have been
known. The Applegates asserted the following claims: fraudulent
misrepresentation (Count 1), fraud by omission (Count 2), breach of contract
(Count 3), unfair and deceptive trade acts or practices (Count 4), negligent
2

misrepresentation (Count 5), negligent failure to disclose (Count 6), breach of the
covenant of good faith and fair dealing (Count 7), negligence (Count 8), and
punitive damages (Count 9). (Id. ¶¶ 39-103.) The Applegates pray for rescission
of the Purchase Contract, disgorgement of all sales commissions from the State
Court Defendants, restitution for all amounts they paid pursuant to the Purchase
Contract, and other damages. (Id. at 20-21.)
B.D. Properties Hawaii, LLC, which is one of the State Court
Defendants, was insured by a Miscellaneous Professional Liability Policy issued
by Axis Surplus Insurance Company. (Complaint ¶ 9.) After B.D. Properties
tendered the underlying state court action to Axis for coverage under the Policy,
Axis denied coverage. (Id. ¶¶ 10-13.)
On August 26, 2013, B.D. Properties filed a declaratory judgment
action against Axis in the Second Circuit Court. (Id.) The Complaint seeks a
declaration “that [B.D. Properties] is entitled to defense, indemnity, or both under
the Policy,” an order that Axis pay benefits under the Policy, and reasonable
attorneys’ fees and costs. (Id. at 3.)
On November 15, 2013, Axis removed the declaratory action to
federal court based on diversity jurisdiction. (Notice of Removal at 1.) On
December 13, 2013, B.D. Properties filed the present Motion to Remand, asking
3

this court to exercise its discretion in declining jurisdiction over this declaratory
action.
DISCUSSION
Plaintiff moves to remand this action to the Second Circuit Court of
the State of Hawaii. Plaintiff asks this Court to abstain from exercising
discretionary jurisdiction over this declaratory action for two primary reasons:
(1) the overlapping factual issues before this Court and the state court and (2) this
declaratory action presents an unsettled issue of state law. The parties agree that
this Court should consider certain factors in determining whether to remand this
case. As discussed below, in light of the factual and legal issues presented in this
declaratory action, the Court finds that the factors weigh in favor of remanding this
case to state court.
The Declaratory Judgment Act provides that “any court of the United
States . . . may declare the rights and other legal relations of any interested party
seeking such declaration.” 28. U.S.C. § 2201(a). The “decision whether to
exercise jurisdiction over a declaratory action lies in the sound discretion of the
district court.” Huth v. Hartford Ins. Co. of the Midwest, 298 F.3d 800, 803 (9th
Cir. 2002).

4

The Court’s discretion in deciding whether to exercise jurisdiction
over declaratory actions is governed by factors enunciated in Brillhart v. Excess
Ins. Co. of Am., 316 U.S. 491 (1942): (1) avoidance of needless determination of
state law issues; (2) discouragement of filing a declaratory action as a means of
forum shopping; and (3) avoidance of duplicative litigation. See Gov’t Employees
Ins. Co. v. Dizol, 133 F.3d 1220, 1225 (9th Cir.1998) (en banc). “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.” Id. Other factors to consider are whether the
declaratory action is brought merely for the purpose of procedural fencing and
whether the declaratory action will result in entanglement between the federal and
state courts. Id. at 1225 n.5.
The parties address each of the foregoing factors in arguing for or
against remanding this case. As discussed below, the factual overlap and the
unsettled issue of state law warrant remanding this case.
A.

Overlapping Factual Issues in the State and Federal Cases

When considering the Brillhart factors, “[c]onservation of judicial
resources is the underlying principle.” State Farm Fire & Cas. Co. v. Willison, 833
F. Supp. 2d 1200, 1215 (D. Haw. 2011). Courts therefore determine whether
5

overlapping issues of fact will result in duplicative litigation or entanglement
between the federal and state courts. Id.; See Nat’l Chiropractic Mut. Ins. Co. v.
Doe, 23 F. Supp. 2d 1109, 1123 (D. Alaska 1998) (entanglement occurs when a
“declaratory action . . . might interject itself into the fact finding process already
under way in state court”). As discussed below, the Court finds that, because the
factual issues presented in this declaratory action and the state court case overlap,
remand is appropriate.
Defendant invoked certain Policy language and Exclusions in denying
Plaintiff’s demand for defense and indemnity. For example, Defendant relied on
Policy language that coverage will be provided only if “[n]o Insured knew, prior to
the First Inception Date of the Insured’s policy with the Company, of a
circumstance that could reasonably be expected to lead to the Claim.” (Ex. B at
BRN 17-18; Ex. C at BRN 9.) Defendant also denied coverage under the
following Exclusions:
The Company is not obligated to pay Damages or Claim
Expenses or defend Claims for or arising directly or
indirectly out of:
...
2.
An act or omission that a jury, court or arbitrator
finds dishonest, fraudulent, . . . or was committed
while knowing it was wrongful.
...
6.
Gain, profit or advantage to which any Insured is
not legally entitled.
6

(Ex. B at BRN 23-24; Ex. C at BRN 10.)
In determining whether the Policy language and Exclusions warranted
Defendant’s denial of coverage, this Court will have to make findings that the state
court will also have to make with respect to the claims before it. The factual
findings relevant to Policy language prohibiting coverage where Plaintiff had
knowledge of a circumstance that could reasonably be expected to lead to a claim
are the same findings at issue in the state court claims of fraudulent
misrepresentation, fraud by omission, and deceptive trade acts or practices.
Indeed, the state court complaint alleges that Defendant knew or should have
known of defects that it failed to disclose. Similarly, the facts relevant to
Exclusion 2 (whether the Insured engaged in fraudulent conduct) are the same facts
relevant to the state court claims of fraudulent misrepresentation, fraud by
omission, and unfair and deceptive trade acts or practices. Finally, the findings of
fact relevant to this Court’s review of Exclusion 6 (excluding coverage for any
gain or profit to which Plaintiff is not legally entitled) are relevant to the state
court’s inquiry of whether Plaintiff’s allegedly fraudulent conduct resulted in
profit. (See Underlying Complaint at 21 (praying for “[d]isgorgement of all sales
commissions from Defendants.”)) The Court finds that the factual findings

7

relevant to deciding whether Defendant’s denial of coverage was warranted are the
same findings relevant to the state court’s determination of the claims before it.
Because the factual inquiries in the state and federal cases do overlap,
there is a risk of duplicative litigation and entanglement between the courts.
Duplicative litigation is likely because the two courts will have to resolve the same
factual disputes. Entanglement is probable because this Court “might interject
itself into the fact finding process already under way in state court.” See Nat’l
Chiropractic Mut. Ins. Co., 23 F. Supp. 2d at 1123. These overlapping factual
issues tilt the factors of duplicative litigation and entanglement in favor of
remanding this case.
B.

Unresolved Issue of State Law

In determining whether this case presents the Court with a “needless
determination of state law,” the Court considers whether the legal issue presented
is “an area of law Congress expressly reserved to the states.” Keown v. Tudor Ins.
Co., 621 F. Supp. 2d 1025, 1031 (D. Haw. 2008) (quoting Continental Cas. Co. v.
Robsac Indus., 947 F.2d 1367, 1371 (9th Cir. 1991) (overruled in part on other
grounds by Dizol, 133 F.3d at 1225)). This federal action seeks declaratory
judgment that Plaintiff “is entitled to defense, indemnity, or both under the Policy”
as well as an order that Defendant pay insurance benefits under the Policy.
8

Because this dispute solely implicates insurance law, which is “an area of law
expressly left to the states by Congress through the McCarran-Ferguson Act,” the
Court finds that this case clearly involves an area of law reserved for the states.
Robsac, 947 F.2d at 1371.
Furthermore, “[c]ourts abstain from hearing declaratory judgment
actions for the construction of insurance policies when ‘unresolved state law issues
are present.’” Keown, 621 F. Supp. 2d at 1038. This case presents such an
unresolved issue of state law regarding the interpretation of applicable Policy
language.
Specifically, Defendant relied on the following Policy language in
denying Plaintiff’s request for defense or indemnity: “The Company will pay on
the Insured’s behalf those sums . . . that any Insured, in performing Insured
Services for others, becomes legally obligated to pay.” (Ex. C at BRN 6; Ex. D at
BRN 1983.) The Policy names “B.D. Properties Hawaii, LLC” as the Insured.
(Ex. B at BRN 13.) Gregory Brown is the sole member of the Insured (B.D.
Properties Hawaii, LLC) and the state court action alleges that he engaged in
fraudulent conduct while selling his own property. Defendant therefore argues that
the Insured (B.D. Properties Hawaii, LLC) was performing services for itself (i.e.,
for its sole member, Gregory Brown), not for “others.” (Ex. C at BRN 9; Ex. D at
9

BRN 1983.) Plaintiff counters that, because Gregory Brown is not a named
Insured under the Policy, B.D. Properties Hawaii, LLC was in fact performing
services for “others” when it performed services for Gregory Brown.
The parties clearly dispute whether the Insured (B.D. Properties
Hawaii, LLC) was performing services for “others” when it performed services for
Gregory Brown, its sole member. The parties agree, however, that Hawaii courts
have not interpreted the term “others” in the insurance context. (Motion at 12
(“Hawaii Courts have not interpreted the term[] ‘others’”); Opp. at 12 (noting the
“absence of Hawaii law on the precise issue of how to interpret the term ‘others’ in
this context”).) The parties point to different state statutes concerning Limited
Liability Companies in arguing that the interpretation of “others” under the Policy
includes – or does not include – work done for Gregory Brown. (Ex. D at BRN
1984 (Defendant relies on Haw. Rev. Stat. § 428-301(a)(1) (“Each member is an
agent of the [LLC] for the purpose of its business.”)); Reply at 8 (Plaintiff relies on
Haw. Rev. Stat. § 428-201 (“A [LLC] is a legal entity distinct from its members.”))
These competing statutes and their application to the Policy are best left to the state
court to decide. Keown, 621 F. Supp. 2d at 1038 (“Courts abstain from hearing
declaratory judgment actions for the construction of insurance policies when
‘unresolved state law issues are present.”).
10

In light of the unresolved issue of state law regarding the
interpretation of the term “others” in the Policy, the Court finds that this factor –
whether there is a needless determination of state law – weighs in favor of
remanding the case to state court.
C.

Other Factors

The Court finds that the reasons discussed above – overlapping factual
issues and an unresolved issue of state law – compel this Court to recommend
remanding this case. The other factors – whether Defendant removed this case as a
means of forum shopping or for the purpose of procedural fencing – are neutral
and do not weigh for or against remand.
Although this court routinely hears insurance declaratory actions
when they are initially filed in federal court, the fact that this action was removed
to federal court changes the posture of this case. Had Defendant filed this case in
federal court, there would be no issue of remand. Indeed, this Court would have
subject matter jurisdiction over this case regardless of where it was initiated. But
because Plaintiff chose to file its case in state court, it now has the opportunity to
ask this Court to decline from exercising jurisdiction over this case. Because the
Brillhart factors weigh in favor of remand and this Court must strictly construe the

11

removal statute against removal jurisdiction, the Court recommends that this case
be remanded to state court. Gaus v. Miles, 980 F.2d 564, 566 (9th Cir. 1992).
CONCLUSION
In light of the foregoing, the Court finds and recommends that
Plaintiff’s Motion to Remand to Second Circuit Court, State of Hawaii (Doc. 8) be
GRANTED. The Court recommends that this case be remanded to the Second
Circuit Court of the State of Hawaii.
Any Objection to these Findings and Recommendations shall be filed
in accordance with the Federal Rules of Civil Procedure and the Local Rules of this
Court.
DATED: Honolulu, Hawaii, February 1, 2014.
IT IS SO ORDERED.

/S/ Barry M. Kurren
Barry M. Kurren
United States Magistrate Judge

B.D. Properties Hawaii, LLC v. Axis Surplus Ins. Co., Civ. No. 13-00619 ACK-BMK;
FINDINGS AND RECOMMENDATION TO GRANT PLAINTIFF’S MOTION TO REMAND
THE CASE TO SECOND CIRCUIT COURT, STATE OF HAWAII.
12