HEMBREE CONSULTING SERVICES, INC. et al v. MESA UNDERWRITERS SPECIALITY INSURANCE COMPANY et al

Filing 83

ORDER adopting Magistrate Judge's 40 Report and Recommendations AND denying 13 and 37 MUSIC'S Motion to Dismiss. Signed by Judge Richard L. Young on 3/31/2016. (TMD)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION

HEMBREE CONSULTING SERVICES,
INC. and LARRY HEMBREE,
Plaintiffs,
vs.
MESA UNDERWRITERS SPECIALITY
INSURANCE COMPANY,
COLONY INSURANCE COMPANY and
XTEC, INCORPORATED,
Defendants.

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1:15-cv-00686-RLY-MJD

ENTRY ON DEFENDANT’S RULE 72(b) OBJECTION TO AMENDED REPORT
AND RECOMMENDATION ON DEFENDANT’S MOTION TO DISMISS
On October 1, 2015, the Magistrate Judge issued a Report and Recommendation
(“R&R”) on Defendant Mesa Underwriters Specialty Insurance Company’s (“MUSIC”)
Motion to Dismiss, which was later amended in light of new circumstances. (See Filing
Nos. 36, 40). In both R&Rs, the Magistrate Judge recommended that MUSIC’s motion
be denied. MUSIC promptly filed the present Objection to the Amended R&R. For the
reasons set forth below, the court OVERRULES MUSIC’s Objection.
I.

Background
On December 12, 2013, XTec, Incorporated filed a lawsuit in Florida state court

against Larry Hembree and Hembree Consulting Services, Inc. (“HCS”) (collectively
“Hembree”) for, among other allegations, defamation, misuse of intellectual property,
and common law trade disparagement. (Filing No. 1, Compl. ¶¶ 9-12). On March 20,
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2014, Hembree removed that case to the United States District Court for the Southern
District of Florida. Case No. 1:14-cv-21029-CMA (the “Underlying Action”). Hembree
claimed that Colony Insurance Company and MUSIC must defend and indemnify him in
the Underlying Action based upon his October 1, 2009 to October 1, 2010 policy with
Colony, and his January 17, 2014 to January 17, 2015 policy with MUSIC. (Id. ¶¶ 14,
18; Filing No. 1-2, MUSIC Policy at 2).
On March 7, 2014, MUSIC sent a letter agreeing to defend Hembree in the
Underlying Action under a reservation of rights. (Compl. ¶ 15). MUSIC eventually paid
Hembree $25,000 as partial reimbursement for Hembree’s already paid attorney fees and
expenses. (Id. ¶ 22). On December 1, 2014, however, MUSIC notified Hembree that it
would no longer reimburse him for his legal expenses. (Id. ¶ 25).
On February 13, 2014, MUSIC filed a declaratory judgment action against
Hembree in the Southern District of Florida (“the Florida Action”), seeking a declaration
that it has no obligation to defend or indemnify Hembree in the Underlying Action.
(Filing No. 1-2, MUSIC’s Compl.). On April 4, 2014, Hembree filed the present
declaratory judgment action against MUSIC, XTec, and Colony, seeking a declaratory
judgment that Colony and MUSIC are obligated to defend and indemnify him in his
lawsuit with XTex. (See Compl.).
On June 22, 2015, MUSIC filed a motion to dismiss the present action because it
is duplicative of the action first filed by MUSIC in the Southern District of Florida. The
court referred the motion to the Magistrate Judge, and, on October 1, 2015, he
recommended that the court deny the motion. Relying on Research Automation, Inc. v.
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Schrader-Bridgeport Int’l, Inc., 626 F.3d 973 (7th Cir. 2010), the Magistrate Judge found
that the “first-filed” rule does not apply in the Seventh Circuit. In addition, he found the
motion should have been brought as a motion to transfer venue under 28 U.S.C. §
1404(a), and analyzed the motion under that framework. (See Filing No. 36, Report and
Recommendation at 4, n. 2). Pursuant to that analysis, the Magistrate Judge concluded
that the Southern District of Indiana was the more appropriate forum to resolve the
parties’ dispute. Notably, he found that MUSIC, a New Jersey corporation, issued its
policy in Indiana and that policy is governed by Indiana law; Hembree is an Indiana
resident; HCS is an Indiana corporation with its principal place of business in
Indianapolis, Indiana; XTec, 1 the only party from Florida, has not appeared in this case;
and Colony, a Virginia corporation, is not a party to the action filed by MUSIC in the
Southern District of Florida. (Id. at 5-6). He therefore denied the motion without
prejudice to MUSIC’s right to refile its motion as a motion to transfer venue “if
circumstances change so as to materially alter the bases upon which this motion presently
stands.” (Id. at 8).
On October 2, 2015, Senior Judge James King from the Southern District of
Florida issued an Order denying Hembree’s Motion to Dismiss for Improper Venue
brought under Rule 12(b)(3) of the Federal Rules of Civil Procedure. (Filing No. 37-1,
Order Denying Defendants’ Motion to Dismiss in Case No. 15-20605-CIV-KING). The
court concluded that venue was proper in the Southern District of Indiana because that is

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The Complaint alleges that “XTec has been joined in this Lawsuit to permit it to assert any
rights it claims to the MUSIC Policy or the Colony Policy.” (Compl. ¶ 14).

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the situs where Hembree demanded, and MUSIC denied, coverage for the Underlying
Action. He also concluded that venue was proper in the Southern District of Florida
because the events giving rise to the Underlying Action occurred in the Southern District
of Florida. (Id. at 3). Accordingly, Judge King denied the motion.
On October 6, 2015, MUSIC filed a Notice of Material Change in Circumstances,
Renewed Motion to Dismiss, and Request for Expedited Ruling. (Filing No. 37). That
motion was referred to the Magistrate Judge, who issued an Amended Report and
Recommendation. (Filing No. 40). The Magistrate Judge once again found that the
Southern District of Indiana is the preferred forum for this dispute. He noted that the
Southern District of Indiana and the Southern District of Florida are both proper venues
for this action, but that “the salient issue here is which venue is the preferred venue for
the suit, which requires a motion to transfer analysis pursuant to 28 U.S.C. § 1404(a), not
a motion to dismiss.” (Id. at 8-9) (emphasis in original). Because the court “has
insufficient information to make a definitive ruling on the preferred forum for his suit,”
he denied the motion to dismiss. (Id. at 9).
On October 14, 2015, Hembree filed a Motion to Reconsider Judge King’s Order
because he failed to address Hembree’s alternative Motion to Transfer to the Southern
District of Indiana. (Case No. 1:15-cv-20605-JEM, Filing No. 27). That motion is fully
briefed, and is currently before Judge Jose E. Martinez. (Id., Filing No. 26).
On October 14, 2015 – the same day Hembree filed its Motion to Reconsider –
MUSIC filed this Objection.

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II.

Discussion
Generally, if two actions are pending in two different courts that concern the same

general claims, the first-filed case takes priority. See Serlin v. Arthur Andersen & Co., 3
F.3d 221, 223 (7th Cir. 1993); Askin v. Quaker Oats Co., No. 11 CV 111, 2012 WL
517491, *3 (N.D. Ill. Feb. 15, 2012); Pfizer, Inc. v. Apotex, Inc., 640 F. Supp. 2d 1006,
1007 (N.D. Ill. 2009); Essex Group, Inc. v. Cobra Wire & Cable, Inc., 100 F. Supp. 2d
912, 914 (N.D. Ind. 2000). The Seventh Circuit, however, “has never adhered to a rigid
‘first to file’ rule.” Trippe Mfg. Co. v. Am. Pwr. Conversion Corp., 46 F.3d 624, 629 (7th
Cir. 1995). Seventh Circuit case law reflects three exceptions to this general rule. First,
courts generally “give priority to the coercive action [over the declaratory judgment
action], regardless of which case was filed first.” Research Automation, 626 F.3d at 980.
Second, courts depart from the first-to-file rule if the declaratory judgment action is filed
in anticipation of litigation by the other party. Id. Finally, courts depart from the first-tofile rule when a party moves to transfer venue under 28 U.S.C. § 1404(a). Id. at 982
(“[W]here a district court faces one of two identical lawsuits and one party moves to
transfer to the other forum, the court should do no more than consider the order in which
the suits were filed among the factors it evaluates under 28 U.S.C. § 1404(a).”). The
court therefore finds that the Magistrate Judge’s reliance on Research Automation for his
conclusion that the doctrine no longer applies in this circuit is in error. As noted above,
the holding in that case is limited to motions to transfer venue under § 1404(a).
Moreover, Research Automation specifically states that when mirror-image lawsuits are
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pending in two different forums, a party may move to dismiss, transfer, or enjoin one of
the lawsuits. Id. at 975. Therefore, MUSIC’s motion to dismiss is procedurally correct.
Although it could have filed a motion to transfer venue under 28 U.S.C. § 1404(a), it was
not required to.
In McReynolds v. Merrill Lynch & Co., Inc., issued two years after Research
Automation, the Seventh Circuit affirmed the district court’s dismissal of plaintiffs’
lawsuit as duplicative of prior ongoing litigation of which they were a part. 694 F.3d
873, 888-89 (7th Cir. 2012). In reaching its decision, the court noted that a district court
has “significant latitude” when deciding whether to dismiss a complaint as “‘duplicative
of a parallel action already pending in another federal court.’” Id. at 888 (quoting Serlin,
3 F.3d at 223).
The claims asserted in this lawsuit are the mirror-image of the claims asserted in
MUSIC’s Florida Action. Both seek a declaratory judgment on the issue of coverage for
the Underlying Action. The issue to be resolved is the appropriate remedy. “When
comity among tribunals justifies giving priority to a particular suit, the other action (or
actions) should be stayed, rather than dismissed, unless it is absolutely clear that
dismissal cannot adversely affect any litigant’s interests.” Central States, S.E. & S.W.
Areas Pension Fund v. Paramount Liquor Co., 203 F.3d 442, 444-45 (7th Cir. 2000).
The court finds a stay in this instance would only serve to delay the proceedings in
both forums. A review of the docket sheet in this action reflects that the parties are
engaging in written discovery, Colony has filed an amended counterclaim, and counsel
for XTec have filed appearances. The docket in the Florida Action shows only the
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pending motion to reconsider Hembree’s motion to transfer venue to the Southern
District of Indiana. Given the procedural posture of both cases, that court finds that the
best course of action is to overrule MUSIC’s Objection and allow this case to proceed
until such time as the Florida Court resolves Hembree’s motion to reconsider. If the
Florida Court denies the motion to reconsider and determines that Florida is the more
convenient forum, MUSIC may then move to transfer this action to the Florida Court
under 28 U.S.C. § 1404(a).
III.

Conclusion
At this stage of the litigation, the court finds the interests of justice are best served

by maintaining this action in the Southern District of Indiana. Accordingly, the court
OVERRULES MUSIC’s Objection (Filing No. 44), ADOPTS the Amended Report and
Recommendation (Filing No. 40), and DENIES MUSIC’s Motions to Dismiss (Filing
Nos. 13, 37).

SO ORDERED this 31st day of March 2016.
__________________________________
RICHARD L. YOUNG, CHIEF JUDGE
United States District Court
Southern District of Indiana

Distributed Electronically to Registered Counsel of Record.

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