Peerless Indemnity Insurance Company v. Smith et al

Filing 21

MEMORANDUM OPINION & ORDER, granting 14 MOTION to Dismiss or in the Alternative to Abstain by Anthony A. Smith, Clifford C. Smith, II ; matter be DISMISSED WITH PREJUDICE. Signed by Judge Henry R. Wilhoit, Jr on 11/25/13.(SMT)cc: COR

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF KENTUCKY

NORTHERN DIVISION

ASHLAND

Civil Action No. 13-49-HRW

PEERLESS INDEMNITY INSURANCE COMPANY,

v.

PETITIONER,

MEMORANDUM OPINION AND ORDER

CLIFFORD C. SMITH, et al.,

RESPONDENT.

This matter is before the Court upon Respondents' Motion to Dismiss, or in the
Alternative, to Abstain [Docket No. 14]. The motion has been fully briefed [Docket Nos.
16 and 18] and, for the reasons stated herein, the Court finds that dismissal is proper as
this lawsuit involves issues of state law which are presented in an action currently
pending in the Morgan Circuit Court.

I.

FACTUAL AND PROCEDURAL BACKGROUND

This case arises from the tornado which devastated West Liberty, Kentucky on
March 2, 2012. A commercial building owned by Clifford Cornelius Smith was among
those damaged by the storm. At the time of the damage, the building was covered by a
policy issued by Peerless Indemnity Insurance Company (hereinafter "Peerless").
Disputes arose between Smith and Peerless regarding compensation for the loss under the
policy.
Peerless filed this civil action pursuant to the Declaratory Judgment Act 28 U.S.C.

§ 2201 and Fed.R.Civ.P.S7 seeking a declaration that no additional payments are owed

under the policy of insurance cited above for the losses incurred as a result of the tornado.
Three months later, Respondents filed a civil action in Morgan Circuit Court for
damages stemming from the same loss. The state court Complaint names Peerless and its
adjustor Anthony DeCesare as defendants and includes both contract claims related to the
insurance policy covering the insured property and tort claims against Peerless and
DeCesare related to their bad faith handling of the insurance claim. I
Respondents seek a dismissal of this matter, or, ask that the Court abstain from
presiding over it in favor of the pending state court litigation.

II.

STANDARD OF REVIEW

The Federal Declaratory Judgments Act 28 U.S.C. § 2201 is a procedural device
that enlarges the range of remedies available to the federal courts. The Act seeks to
provide an immediate forum for adjudication of rights and obligations in an actual
controversy so that parties may resolve disputes with expediency and economy in their
entirety. See generally, Commodities Export Co. v. Detroit Intern. Bridge Co., 695 F .3d
518 (6 th Cir. 2012). As a discretionary procedural device, the Act does not increase the
United States district courts' jurisdiction over substantive rights of litigants or create any
new causes of action. See Buckleyv. US, 494 F.Supp. 1000, 1002 (E.D.Ky. 1980).
Jurisdiction under the act neither automatic nor absolute. Rather, the Act states

Peerless attempted to remove the case to this Court. See Smith,
et. al. v. Peerless, et. al., 13-97-HRW (E.D.Ky.
). However,
the matter was remanded to Morgan County by Order entered on
I

that federal courts "may" enter declaratory judgments in "case[s] of actual controversy."
28 U.S.C. § 2201(a) (emphasis added). Indeed, the Act "'confer[s] on federal courts
unique and substantial discretion in deciding whether to declare the rights of litigants.'"
Montpelier US Ins. Co. v. Collins No. ll-cv-141 (E.D. Ky. February 22, 20 12)(Thapar,
J.) (quoting Wilton v. Seven Falls Co., 515 U.S. 277, 286, (1995). "The most important
consideration in exercising this discretion is whether retaining jurisdiction interferes with
state-court litigation." Id.

A federal court should decline to entertain a declaratory

judgement if doing so would result in "[g]ratuitous interference with the orderly and
comprehensive disposition of ... state court litigation". Brillhart v. Excess Ins. Company
a/America, 316 U.S. 491, 495 (1942).
This branch of the abstention doctrine is particularly relevant in instances where an
insurance company seeks a declaratory judgment as to their underlying state court
lawsuits. In this situation, the United States Court of Appeals for the Sixth Circuit has
routinely held that the district Court should dismiss the complaint for declaratory
judgment. See e.g. Travelers Indem. Co. v. Bowling Green Pro!'l Assocs., 495 F.3d 266,
273 (6th Cir. 2007) (remanding suit brought under the Declaratory Judgment Act with
instructions to dismiss for lack of jurisdiction); Manley, Bennett, McDonald & Co. v. St.
Paul Fire & Marine Ins. Co., 791 F.2d 460,463 (6th Cir. 1986)("declaratory judgment
actions seeking an advance opinion on indemnity issues are seldom helpful in resolving
an ongoing action in another court").
Application of the Declaratory Judgment Act during the pendency of a parallel

state proceeding involves a balancing of the competing concepts of federalism, comity
and basic fairness. The Sixth Circuit articulated a list of factors to be considered in
determining whether a declaratory ruling is appropriate: "( 1) the declaratory action would
settle the controversy; (2) a declaratory judgment would increase friction between federal
and state courts; (3) an alternative, better remedy is available; (4) a declaratory judgment
would serve a useful purpose in clarifYing the legal relations in issue; and (5) the
declaratory remedy is being sought merely to provide an arena for a race for res judicata."
Grand Trunk

III.

w: R. Co. v. Conso/. Rail Corp., 746 F.2d 323, 326 (6th Cir. 1984).
ANALYSIS

These factors weigh in favor of dismissal. First, the declaratory action will not
settle the controversy between these parties. In considering this factor, the Court is
mindful that the question is not whether issuing a declaratory judgment would settle the
controversy immediately before the Court, but whether doing so would settle the
"ultimate controversy" in the underlying state court litigation. See Atain Specialty
Insurance v. Dwyer Concrete Lifting o/Lexington, 2012 WL 2119407 (E.D. Ky. 2012) at
*3.

In this action, Peerless seeks only a declaration ofthe parties' responsibilities
under the insurance policy, whereas the state court Complaint also alleges that Peerless
acted in bad faith when it refused to timely settle the Smiths' insurance claim. The instant
case does not address the entirety ofthe dispute between the parties. Judge Thapar's
analysis in Atain is on point:

Although a declaratory judgment in favor of [the insurer] would likely
resolve the bad faith claim-if [the insurer] had no obligation to pay, then it
had no obligation to settle-arguing that this favors jurisdiction only looks
at one side of the coin. A ruling against [the insurer] would compel the
parties to return to state court to resolve the remaining bad-faith and unfair­
settlement claims. A declaratory judgment action that would settle the
underlying state-court litigation only if the Court rules a certain way still
poses an undue risk of forcing the parties to engage in fractured, piecemeal
litigation and thus weighs against exercising jurisdiction.
Id.

To aid in the assessment under the second factor - the potential "friction" between
federal and state courts, the Sixth Circuit has identified three additional factors to
consider:
(1) whether the underlying factual issues are important to an informed
resolution of the case; (2) whether the state trial court is in a better position
to evaluate those factual issues than is the federal court; and (3) whether
there is a close nexus between the underlying factual and legal issues and
state law and/or public policy, or whether federal common or statutory law
dictates a resolution ofthe declaratory judgment action.
Bituminous Cas. Corp. v. J & L Lumber Co. Inc., 373 F.3d 807, 814-815 (6th Cir. 2004).

The interpretation of the subject insurance contract and the issue of bad faith are
issues of state law with which the Kentucky state courts are more familiar and, therefore,
better able to resolve. Moreover, insurance is topic of particular interest to a state.
"[S]tates regulate insurance companies for the protection of their residents, and state
courts are best situated to identifY and enforce the public policies that form the foundation
of such regulation." Id. at 815. This notion has been frequently applied in cases of
insurance contract interpretation and [the Sixth Circuit has] held on a number of
occasions that a district court should stay or dismiss complaints filed by insurance

companies seeking a declaratory judgment as to their underlying state court lawsuits."
Travelers~

495 F.3d at 273.

The question of whether the state court provides an

alternative~

better remedy is

easily answered. Peerless may raise the same arguments made before this Court in the
Morgan Circuit Court.

Moreover~

Kentucky law allows for declaratory judgments,

thereby affording Peerless the option of instituting a separate action. See KRS 1418.040.
As for the fourth factor, whether ddeciding this case would serve a truly "useful
purpose" by clarifying the legal relationships between the parties, it is another chip shot.
As the Sixth Circuit recognized in Bituminous Cas.

Corp.~

373 F.3d at

813-14~

when a

federal court decides a declaratory judgment action presenting the exact same issues as
those presented in a state court proceeding~ there is simply "no good result."
Finally, this Court must consider whether forum shopping or procedural fencing
informed Peerless' declaratory judgment petition. In this Circuit, "[c]ourts take a dim
view of declaratory plaintiffs who file their suits mere days or weeks before the coercive
suits filed by a 'natural plaintiff and who seem to have done so for the purpose of
acquiring a favorable forum." AmSouth Bank v. Dale, 386 F.3d 763, 788 (6 th Cir. 2004).
Moreover, "[t]he Sixth Circuit has consistently warned district courts to be cautious
when an insurance company files a declaratory action before the insured files its suit
because allowing such actions to go forward 'can deter settlement negotiations and
encourage races to the courthouse.'" Atain . at

* 5 (internal citation omitted).

Peerless contends it instigated this civil action because the Smiths did not negotiate

with it in attempting to resolve the underlying claim. The Smiths maintain that, rather
than responding to their attempts to settle the claim, Peerless filed this action. The
undersigned is not a prophet and is not inclined to speculate as to motives. However,
erring on the side of the "caution" cited in Atain and its primogenitors, the Court finds
that this factor, too, favors dismissal.
IV.

CONCLUSION

The parties agree that the Court's exercise ofjurisdiction over this matter is
discretionary. Discretion being the better part of valor, this Court will abstain from
deciding what is purely a question of state law and permit the parties to litigate all their
claims before the Morgan Circuit Court.
Accordingly, IT IS HEREBY ORDERED that Respondents' Motion to Dismiss,
or in the Alternative, to Abstain [Docket No. 14] be SUSTAINED and that this matter be
DISMISSED WITH PREJUDICED.
This 25 th day of November, 2013.