TRAVCO INSURANCE COMPANY v. WEBSTER et al

Filing 15

Order Denying Defendants' Motion to Stay: The court therefore DENIES the efendants' motion to stay this case. By separate entry, the court will schedule an initial pretrial conference ***SEE ORDER FOR ADDITIONAL INFORMATION***. Signed by Magistrate Judge Debra McVicker Lynch on 4/25/2014. (DW)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
TRAVCO INSURANCE COMPANY,
Plaintiff,
vs.
CHRISTOPHER WEBSTER,
KINDRA WEBSTER,
AARON MANIFOLD,
ERIN MANIFOLD,
Defendants.

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Order Denying Defendants’ Motion to Stay (Dkt. 7)
The complaint filed by plaintiff Travco Insurance Company seeks a
declaratory judgment regarding Travco’s defense and indemnity obligations under a
homeowners’ insurance policy (the “Policy”) it issued to Christopher and Kindra
Webster with respect to claims asserted against them by Aaron and Erin Manifold
in a wrongful death case filed in Hamilton Superior Court (“State Court”). The
Websters and Manifolds jointly move for a stay of this case in favor of proceedings
supplemental in the State Court. (Dkt. 7). They argue that the insurance issues
about which Travco seeks a declaratory judgment are pending in the State Court
and that this court should enter a stay under the Supreme Court’s Brillhart/Wilton
abstention doctrine. Brillhart/Wilton allows a district court, in its discretion and
without the presence of extraordinary circumstances, to dismiss or stay a
declaratory judgment action because of the pendency of parallel state court

proceedings. See Wilton v. Seven Falls Company, 515 U.S. 277 (1995); Brillhart v.
Excess Ins. Co., 316 U.S. 491 (1942).
Because the court is not persuaded that in its current posture the State Court
litigation is a parallel proceeding, it denies the defendants’ motion for a stay of this
case. The court first describes the State Court proceedings and then explains the
rationale for declining to enter a stay.
The State Court Proceedings
In October 2012, the Manifolds’ infant daughter suffered fatal injuries while
in the care of Mrs. Kindra Webster in the Websters’ home. After the death, the
Websters made a claim under the Policy but Travco decided that the Policy excluded
coverage based on its determination that the death arose out of or in connection
with a day care business operated by the Websters. (Dkt. 1-3, pp.1&2). The
Manifolds then filed suit in Hamilton Superior Court in March 2013 and the
Websters asked Travco to provide a defense and indemnity against any judgment.
Travco again determined that a business exclusion under the Policy applied, and
that because the Manifolds’ claim fell outside coverage, Travco would not defend the
Websters. Travco told the Websters that they must defend themselves and hire
counsel at their own cost. (Dkt. 1-3, p. 3).
On July 16, 2013, the Websters were defaulted in the State Court case and a
damages hearing was set for September 5, 2013. (Dkt. 8-3). On September 4, 2013,
the Websters (at that time represented by counsel) and the Manifolds entered into a
Consent Judgment. (Dkt. 1-4). Under the Consent Judgment, the Websters

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admitted their negligence, agreed that the Manifolds’ damages were $1,002,175,
and agreed to pay $2,175 of that amount and to provide a written apology to the
Manifolds. The Websters also assigned to the Manifolds all rights and causes of
actions they may have against Travco for payment of the remaining $1.0 million.
On September 5, the State Court entered the Consent Judgment as a final
judgment against the Websters. (Dkt. 8-5).
On December 4, 2013, the Manifolds—as judgment creditors—filed in the
State Court case a motion for proceedings supplemental. They named Travco as a
garnishee-defendant, and asked the court “after hearing” to make a finding that
Travco “is in possession of property that [the Websters] have due and owing and
issue an appropriate order to apply said property towards the Judgment pursuant
to statute.” (Dkt. 8-6 at p. 2). Their motion included a copy of the Policy. The
Manifolds also obtained an order from the State Court (which they had submitted
for the court’s consideration) requiring Travco to answer certain interrogatories
about the Policy. The order set a hearing at which Travco would be required to
present “any claim or defense” under its Policy. The order states: “Any claim or
defense to the proceedings supplemental or garnishment order must be presented at
the time and place of the hearing specified herein.” (Dkt. 8-9). The State Court
filled in blanks in the Websters’ tendered order that set the hearing for January 29,
2014.
Travco obtained a continuance of the hearing to March 5, 2014, and in the
meantime filed the complaint for declaratory judgment in this court. It then asked

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the State Court to stay its proceedings. The State Court denied the request for a
stay and ordered Travco to answer the interrogatories. Its order to answer
interrogatories states that answering “shall not be construed as a waiver of
[Travco’s] federal declaratory judgment action.” Dkt. 14-1. The interrogatories ask
Travco whether it issued a homeowners’ policy to the Websters for the period
October 1, 2011, through October 1, 2012, and seek production of the policy (Dkt. 87). Travco apparently has answered the interrogatories, though this court has not
been provided a copy. According to the parties, no case management procedures for
discovery, summary judgment briefing, or trial to adjudicate insurance coverage
issues have been set in the State Court. (Dkt. 14).
Analysis
I.

The Brillhart/Wilton abstention doctrine applies to declaratory
judgment act cases.
In Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942), the Supreme Court held

that a district court is under “no compulsion to exercise” its jurisdiction under the
Declaratory Judgment Act, 28 U.S.C. § 2201. Id. at 494. If all matters that are in
controversy in the federal suit can be adequately tested and satisfactorily
adjudicated in a pending state court proceeding, then a federal district court should
probably abstain and avoid “[g]ratuitous interference with the orderly and
comprehensive disposition of a state court litigation.” Id. at 495.
Brillhart concerned a district court’s dismissal of a declaratory judgment suit
brought by a reinsurer that its agreement to reinsure certain obligations of an
insurance company (Central Mutual) which had been liquidated did not provide
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indemnity coverage on a state court judgment. Central Mutual had insured a
person whose actions caused the death of another in an auto accident. Central
Mutual had determined there was no coverage under its policy and refused to
defend its insured. Its insured suffered a default judgment. The decedent’s estate
sought to collect its judgment against the reinsurer and instituted proceedings
supplemental under Missouri state law. The federal district court dismissed the
declaratory judgment action on the estate’s motion, which argued that the
reinsurer’s coverage obligations could be decided in the garnishment proceeding
pending in the Missouri state court. Id. at 493. The district court’s decision did not,
however, expressly address whether all coverage issues in the federal case could in
fact adequately be tested in the garnishment proceeding.
The Supreme Court ruled that in exercising discretion to refrain from
entertaining the declaratory judgment suit, the district court must address whether
all matters in controversy in the federal suit can be fully adjudicated in the state
litigation. Id. at 495. To the extent there is doubt whether the state garnishment
proceeding allows adequate adjudication of all claims among all parties, the district
court properly may refuse to abstain from exercising its jurisdiction under the
Declaratory Judgment Act (“DJA”). Id. at 496-97.
Fifty years later, in Wilton v. Seven Halls Company, 515 U.S. 277 (1995), the
Court again addressed in the context of an insurance coverage dispute a district
court’s discretion to abstain from exercising its jurisdiction under the DJA in favor
of a parallel state proceeding. It ruled that Brillhart was still good law as to DJA

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cases and the “exceptional circumstances” test from the Court’s 1976 Colorado River
case (requiring a district court to exercise its jurisdiction even if there is a parallel
state proceeding except in “exceptional circumstances”) did not apply in the DJA
context. The Court affirmed a district court’s stay of a DJA case where “parallel
proceedings, presenting opportunity for ventilation of the same state law issues,
were underway in state court.” Id. at 290.
The question for this court therefore is whether the garnishment proceedings
in the State Court allow for adequate testing and satisfactory adjudication of all the
issues among all the parties that are pending in this case. On the record before it,
the court is not convinced that the garnishment proceeding is an adequate parallel
proceeding.
II.

The garnishment proceeding is not an adequate parallel
proceeding for adjudication of the insurance claims assigned to
the Manifolds.
The court does not doubt that it is possible for some insurance coverage

issues to be decided in the context of a proceeding supplemental under Indiana law.
There are several reported decisions of the Indiana Supreme Court or Indiana Court
of Appeals in which the courts’ descriptions of the procedural history of the cases
indicate that an insurer’s obligation to pay a judgment was litigated as part of a
proceeding supplemental. E.g., Frankenmuth Mut Ins. Co. v. Williams, 690 N.E.2d
675 (Ind. 1997) (insurer’s liability for policy limits decided on motion for summary
judgment in proceeding supplemental; Supreme Court reversed and remanded for a
trial); Liberty Mut. Ins. Co. v. Metzler, 586 N.E.2d 897 (Ind. Ct. App. 1992) (in

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proceeding supplemental, insurance company filed answer and counterclaim for
declaratory judgment that its policy did not provide coverage and it had no duty to
indemnify its insured for judgment against it; issue was decided on cross-motions
for summary judgment); State Farm Mut. Auto. Ins. Co. v. Glasgow, 478 N.E.2d 918
(Ind. Ct. App. 1985) (in proceeding supplemental, trial court heard evidence
pertaining to whether indemnity coverage was triggered; Court of Appeals reversed
factual findings and remanded for a “full hearing” on the coverage issue).
These cases did not, however, discuss the propriety of using a proceeding
supplemental to decide controverted coverage claims.1 And none of them seems to
have involved circumstances like this case where the judgment-debtor (the
Websters) had assigned their rights under the insurance policy to the judgmentcreditor (the Manifolds) or where the judgment-creditor might assert a bad faith
claim to recover damages in excess of the policy’s limits. (The $1 million judgment
exceeds the policy limits under Travco’s policy.)
In State Farm Mut. Auto. Ins. Co. v. Estep, 873 N.E.2d 1021 (Ind. 2007), the
Indiana Supreme Court stated that the “merits of any assigned [insurance] claim
should not be tried in [a proceeding supplemental].” Id. at 1023 n.4. The court
described a proceeding supplemental as a “limited forum” that is not appropriate for
trying a judgment-creditor’s cause of action against a garnishee-defendant. Id.
In Allstate Ins. Co. v. Morrison, 256 N.E.2d 918 (Ind. Ct. App. 1970), cited by
the defendants, the insurer waived its argument that the garnishment proceeding
did not provide sufficient process for adjudicating its indemnity obligation to its
insured. Id. at 503 (Allstate waived all issues regarding sufficiency of notice and
process and its appeal was limited to whether the trial court’s judgment was
supported by sufficient evidence.)

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Although the majority opinion did not further elaborate, Justice Boehm in his
concurring opinion explained why “a proceeding supplemental is not the proper
forum to resolve the merits of an assigned claim.” Id. at 1028 (Boehm, J.,
concurring and dissenting and joined by Dickson, J).
He noted that before Indiana adopted its Trial Rules in 1970, proceedings
supplemental were always filed as “new and independent civil actions.” With the
adoption of Ind. Trial R. 69(E), Indiana sought to simplify and expedite the process
for determining whether a judgment-debtor holds any assets that can be attached to
satisfy a judgment against him. Id. at 1029. When the judgment-debtor has
assigned his claims, however, those claims are no longer his “property, income, or
profits” capable of attachment within a proceeding supplemental. Id. Justice
Boehm stated that neither Trial Rule 69(E) nor the statute governing proceedings
supplemental (Ind. Code § 34-55-8-7(a)) “purport to confer jurisdiction over the
merits of the assigned claim.” Id. He also considered the practical reasons why an
assigned claim should not be tried in a proceeding supplemental. They include the
fact that Trial Rule 69(E) contemplates expedited procedures that may be wholly
inconsistent with adjudicating an insurance coverage/bad faith dispute that
requires the gathering of evidence and a trial on the merits. Id. at 1030.
This case illustrates the ill fit between procedures contemplated by Indiana
Trial Rule 69(E) and the insurance defense and coverage issues that are at stake
among the parties. Before the Manifolds filed their proceeding supplemental that
named Travco as a garnishee-defendant, the Manifolds (a) had a copy of Travco’s

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policy; (b) had been assigned the Websters’ claims vis-à-vis that policy; and (c) knew
Travco’s legal position that its policy did not provide any coverage because of the
business exclusion. The Manifolds also knew that their contrary view that the
business exclusion did not apply could not be resolved without discovery of the facts
surrounding the Websters’ daycare or babysitting services and either a full-blown
trial or at the least—if the pertinent facts regarding those services were not in
dispute—a considered adjudication of the coverage question through a motion for
summary judgment. They also knew that to the extent they may seek from Travco
any amount in excess of the policy’s limits, still other and different discovery would
be required regarding Travco’s claims adjustment work and a trial or summary
judgment procedures would be necessary to resolve any excess-limits claim.
Despite the need for discovery and the briefing of dispositive motions or a
trial, and despite the fact that the Manifolds hold a $1 million judgment that they
seek to collect from Travco, the Manifolds obtained from the State Court an order
that purported to require a final resolution of defense and coverage issues at a
hearing to take place six weeks after initiating their proceeding supplemental.
Justice Boehm observed in his concurring opinion in Estep that it would be unfair to
try such an insurance coverage dispute in a truncated way within a proceeding
supplemental, and it would defeat the purpose of a proceeding supplemental to
convert it to a full-blown trial. He wrote, “There is no reason to choose either of
these undesirable alternatives. Requiring the matter to be tried as a freestanding
independent lawsuit avoids both.” Estep, 873 N.E.2d at 1030.

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Based on the Indiana Supreme Court’s decision in Estep—joined by all
justices—that with respect to an assigned insurance claim, a proceeding
supplemental is not an appropriate forum to decide the merits of such a claim, this
court decides that abstention under Brillhart/Wilton is not the proper course. The
court observes too that to date no case management procedures have been set in the
State Court case to address discovery, the filing of dispositive motions, or trial. The
court therefore DENIES the defendants’ motion to stay this case. By separate
entry, the court will schedule an initial pretrial conference.
So ORDERED.
04/25/2014
Date: _________________

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Debra McVicker Lynch
United States Magistrate Judge
Southern District of Indiana

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