Westfield Insurance Company v. Estate of Arthur Gene McMahan, Jr. et al
Filing
47
MEMORANDUM AND OPINION by Senior Judge Thomas B. Russell on 5/1/2017; re 38 MOTION to Dismiss filed by A.M. Contracting Company, 40 MOTION to Dismiss filed by Estate of Anthony J. Reece, Estate of Tammy Renee Reece, [1 5] MOTION to Dismiss filed by Westfield Insurance Company, 37 MOTION to Dismiss filed by Estate of Melissa Renee Desimone McMahan, 35 MOTION to Dismiss filed by Estate of Arthur Gene McMahan, Jr. ; a separate order and judgment shall enter.cc:counsel (KJA)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:16-CV-00809-TBR
WESTFIELD INSURANCE COMPANY
PLAINTIFF
v.
ESTATE OF ARTHUR GENE MCMAHAN, JR., et al.
DEFENDANTS
Memorandum Opinion
A tragic boating accident on Lake Lanier, Georgia claimed the lives of Arthur
and Melissa McMahan and Anthony and Tammy Reece.
Westfield Insurance
Company insured Arthur McMahan, the boat’s operator, as well as his wife Melissa
and his company, AM Contracting. After the Reece estates asserted claims against
the McMahans’ three Westfield policies, Westfield brought this action, seeking a
declaration that it has no obligation to pay and defend under the policies. [DN 9.]
Shortly thereafter, the Reece estates filed a wrongful death suit against Arthur
McMahan’s estate in state court. [DN 35-2.] They also filed a counterclaim against
Westfield in this suit for its alleged violation of the Kentucky’s Unfair Claims
Settlement Practices Act. [DN 11.]
Two motions are pending before the Court. Westfield moves to dismiss the
Reece estates’ counterclaim, arguing that no bad faith claim can exist because
Westfield has not yet denied the estates’ claims against the policies.
[DN 15.]
Arthur McMahan’s estate moves to dismiss the entire action, contending that this
Court should decline jurisdiction pursuant to the factors set forth in Grand Trunk
Western Railroad Co. v. Consolidated Rail Co., 746 F.2d 323, 326 (6th Cir. 1984).
[DN 35.] All other Defendants join in that motion. [DN 37; DN 38; DN 40.] Both
motions are fully briefed and ripe for adjudication.
For the reasons explained
below, the Court declines to exercise its discretionary jurisdiction to entertain
Westfield’s declaratory judgment action.
Accordingly, Defendants’ motions to
dismiss [DN 35; DN 37; DN 38; DN 40] are GRANTED, and this case is
DISMISSED WITHOUT PREJUDICE.
Westfield’s motion to dismiss the Reece
estates’ counterclaim [DN 15] is DENIED AS MOOT.
I. Facts and Procedural History
As relevant to Defendants’ motion, the facts of this case are undisputed. On
July 15, 2016, two Kentucky couples, the McMahans and the Reeces, were boating
on Lake Lanier in northeast Georgia. [DN 9 at 3.] Arthur McMahan was operating
his 2009 Skater 388-SS powerboat; his wife Melissa, Anthony Reece, and Tammy
Reece were his passengers. [Id.] While traveling down the lake, the boat hit a
wake, became airborne, and overturned. [Id.] All four passengers were ejected and
killed. [Id.]
The boat was originally purchased by A.M. Contracting Company, a
Kentucky corporation. [Id.] On the date of the accident, the boat is believed to have
been owned by either Arthur McMahan, Melissa McMahan, A.M. Contracting, or
Art McMahan Muscle Motorsports, Arthur McMahan’s sole proprietorship. [Id. at
3-4.] Westfield Insurance Company, an Ohio corporation, insured the McMahans
under an estate policy and a personal umbrella policy, and A.M. Contracting under
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a commercial policy. [Id. at 4.] The personal policies have limits of $500,000 and $3
million, respectively, and the commercial policy has a limit exceeding $75,000. [Id.]
Four months after the accident, attorney for the Reece estates contacted
Westfield, asserting that the estates’ claims against Arthur McMahan’s estate
exceeded Westfield’s policy limits. [Id.] Westfield then filed the instant declaratory
judgment action. It contends that several policy provisions exclude coverage for this
accident.
[Id. at 6.]
Westfield named as Defendants the Estates of Arthur
McMahan, Melissa McMahan, Anthony Reece, Tammy Reece, A.M Contracting
Company, and Art McMahan Muscle Motorsports. Defendants answered, and the
Reece estates included a counterclaim against Westfield for its alleged violation of
Kentucky’s Unfair Claims Settlement Practices Act, KRS 304.12-010 et seq. See
[DN 11.]
Meanwhile,
the
Reece
estates
initiated
proceedings
McMahan’s estate in Bullitt County, Kentucky Circuit Court.
against
Arthur
See [DN 35-2.]
There, the estates allege that McMahan operated his boat in a negligent and
reckless manner, causing the deaths of Anthony and Tammy Reece.
See [id.]
Proceedings in that case are still ongoing.
Westfield then moved to dismiss the Reece estates’ counterclaims. [DN 15.]
It posits that the Reece estates cannot maintain a cause of action for bad faith
against Westfield, because Westfield has not yet denied the estates’ claims against
the McMahan policies – the sine qua non of a bad faith claim. The Reece estates
argue that their claims are not common-law bad faith claims, but rather statutory
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claims under Kentucky law, and that no refusal to pay is necessary for them to
prevail.
More pressing, though, is the motion to dismiss by the estate of Arthur
McMahan. [DN 35.] All other Defendants join his estate in that motion. [DN 37;
DN 38; DN 40.] His estate claims that this Court should decline to exercise its
discretionary jurisdiction to hear this declaratory judgment case, and instead allow
Westfield to litigate the scope of its coverage in the underlying state court action.
Westfield responded, [DN 42], and Defendants replied, [DN 43; DN 44; DN 45; DN
46].
II. Standard of Review
Pursuant to the Declaratory Judgment Act, a federal court “may declare the
rights and other legal relations of any interested party seeking such declaration.”
28 U.S.C. § 2201(a). The Act is an enabling act that “confers a discretion on the
courts” to act “rather than an absolute right upon the litigant.” Wilton v. Seven
Falls Co., 515 U.S. 277, 287 (1995) (quoting Public Serv. Comm'n of Utah v. Wycoff
Co., 344 U.S. 237, 241 (1952)). In other words, the Act authorizes district courts to
exercise jurisdiction, but does not impose a duty to do so. Bituminous Cas. Corp. v.
J & L Lumber Co., Inc., 373 F.3d 807, 812 (6th Cir. 2004); Allstate Ins. Co. v.
Mercier, 913 F.2d 273, 276 (6th Cir. 1990), abrogated on other grounds by Wilton v.
Seven Falls Co., 515 U.S. 277, (1995). A district court may not decline jurisdiction,
however, as a matter of whim or personal disinclination. Mercier, 913 F.2d at 277.
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III. Discussion
The Sixth Circuit has laid down five factors for courts to consider in
determining whether the exercise of declaratory judgment jurisdiction is proper:
(1) whether the declaratory action would settle the controversy; (2)
whether the declaratory action would serve a useful purpose in
clarifying the legal relations in issue; (3) whether the declaratory
remedy is being used merely for the purpose of “procedural fencing” or
“to provide an arena for a race for res judicata;” (4) whether the use of
a declaratory action would increase friction between our federal and
state courts and improperly encroach upon state jurisdiction; and (5)
whether there is an alternative remedy which is better or more
effective.
Grand Trunk W. R. Co. v. Consol. Rail Corp., 746 F.2d 323, 326 (6th Cir. 1984). The
Court will address each factor in turn.
A. Settlement of the Controversy and Clarification of Legal Relations
In insurance coverage cases, most courts consider the first two factors
together because “it is almost always the case that if a declaratory judgment will
settle the controversy, then it will clarify the legal relations in issue.” Scottsdale
Ins. Co. v. Flowers, 513 F.3d 546, 555 (6th Cir. 2008). Confounding the analysis of
these factors is the Sixth Circuit's acknowledgment that it created two lines of cases
which, at first blush, appear at odds. Id. One line of cases approved of declaratory
actions because they can “settle the insurance coverage controversy,” while a second
line of cases disapproved of declaratory actions because while they “might clarify
the legal relationship between the insurer and the insured, they do not settle the
ultimate controversy.”
Id.
The Sixth Circuit explained that this incongruence
results from the “different factual scenarios” that each line of cases presents. Id.
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“In the first line of cases, focusing just on the insurance controversy, a technical or
legal issue is often at the heart of the coverage controversy, and to the extent the
facts of the underlying case matter, they are undisputed.”
Emplrs. Ins. Co. of
Wausau v. Duro-Last Roofing, Inc., No. 11-10206-BC, 2011 WL 2119360, at *6 (E.D.
Mich. Mat 27, 2011). “In the second line of cases, focusing on the controversy as a
whole, resolution of disputed facts in the underlying case will also resolve the
disagreement about coverage.”
Id.; Flowers, 513 F.3d at 555 (collecting cases);
Grange Mut. Cas. Co. v. Safeco Ins. Co. of Am., 565 F. Supp. 2d 779, 786 (E.D. Ky.
2008). “In other words, a declaratory judgment is proper if it will only have to
decide purely legal questions or engage in fact-finding that does not affect the
parties in the underlying action.” Argonaut-Midwest Ins. Co. v. Johnson, No. 3:14CV-00395-TBR, 2014 WL 6804284, at *2 (W.D. Ky. Dec. 3, 2014) (citations and
internal quotation marks omitted).
The Sixth Circuit instructs that actions like Westfield’s “should normally be
filed, if at all, in the court that has jurisdiction over the litigation which gives rise to
the indemnity problem. Otherwise confusing problems of scheduling, orderly
presentation of fact issues and res judicata are created.”
Manley, Bennett,
McDonald & Co. v. St. Paul Fire & Marine Ins. Co., 791 F.2d 460, 463 (6th Cir.
1986). This Court believes those risks are present in this case. Here, Westfield
asks this Court to declare that under its insurance contracts with the McMahans, it
has no duty to indemnify or defend actions arising from the Lake Lanier boating
accident. Westfield points to several policy exclusions, including exclusions “for a
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watercraft that is being ‘[o]perated in or practicing for, a prearranged or organized
race, speed contest or other competition,’” as well as “a watercraft that is being
‘[u]sed for any business purpose.’”
[DN 9 at 6.]
To determine whether these
exclusions apply, this Court must necessarily engage in fact-finding, as the
exclusions do not present pure questions of law. But it appears that these very
same factual issues are also being disputed in the state court action. See [DN 35-2
at 3.]
While this duplicative fact-finding “might clarify the legal relationship
between the insurer and the insured,” it will not “settle the ultimate controversy
between the parties which is ongoing in state court.” Flowers, 513 F.3d at 555
(citations omitted). The first two Grand Trunk factors weigh against the exercise of
jurisdiction.
B. Procedural Fencing
Next, the Court must consider “whether the use of the declaratory judgment
action is motivated by ‘procedural fencing’ or [is] likely to create a race for res
judicata.” Id. at 558. This factor “is meant to preclude jurisdiction for ‘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.’” Id. (quoting AmSouth Bank v. Dale, 386 F.3d 763, 788 (6th Cir.
2004)). Defendants argue that the timing of Westfield’s action, filed four weeks
after the Reece estates notified Westfield of their claim against Arthur McMahan’s
estate, gives rise to an inference of procedural fencing. For its part, Westfield states
that its suit was not a strategic maneuver, but rather “an attempt to timely pursue
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its investigation and have the Court determine Westfield’s coverage obligations.”
[DN 42 at 4.]
Here, there is no direct evidence in the record that Westfield’s action was
motivated by procedural fencing.
In the absence of such evidence, courts “are
reluctant to impute an improper motive to a plaintiff.” Flowers, 513 F.3d at 558
(citations omitted).
Nevertheless, the Sixth Circuit has cautioned that “federal
courts should not ‘seize litigations from state courts merely because one party,
normally a defendant, goes to federal court to begin his . . . defense before the state
court begins the case under state law.” U.S. Fire Ins. Co. v. Albex Aluminum, Inc.,
161 F. App’x 562, 565 (6th Cir. 2006) (quoting AmSouth Bank, 386 F.3d at 775)
(alteration in original). In Albex, the Sixth Circuit held that the district court did
not abuse its discretion by drawing an inference of procedural fencing from the
timing of the insurance company’s complaint. Id. In another case, Star Insurance
Co. v. Smith, this Court’s sister court concluded that an insurer engaged in
procedural fencing by filing a federal action eight days before the natural plaintiff
filed her state action, when the insurer had advance notice of the plaintiff’s
forthcoming claims. Star Ins. Co. v. Smith, No. 14-186-GFVT, 2015 WL 3649896, at
*5 (E.D. Ky. Jun. 11, 2015). See also Liberty Mut. Fire Ins. Co. v. Bohms, 490 F.
App’x 721, 725-26 (6th Cir. 2012) (when insurer filed suit on fifty-ninth day of sixtyday statutory notice period, district court did not abuse discretion by inferring
procedural fencing).
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However, Westfield’s timing is not as suggestive of procedural fencing as that
which occurred in Smith and Bohms. Westfield first learned of the Reece estates’
claims on November 14, 2016, and filed this action one month later. [DN 9 at 4; see
DN 1.] It appears the Reece estates filed their suit in state court on January 30,
2017, six weeks after Westfield filed in federal court. [DN 35-2 at 6.] Without more,
the Court is not willing to impute a bad motive to Westfield. This third factor does
not weigh against the exercise of jurisdiction.
C. Increased Friction between Federal and State Courts
Fourth, the Court must consider “whether accepting jurisdiction would
increase friction between federal and state courts.” Flowers, 513 F.3d at 559. On
this point, “where another suit involving the same parties and presenting
opportunity for ventilation of the same state law issues is pending in state court, a
district court might be indulging in ‘[g]ratuitous interference,’ if it permitted the
federal declaratory action to proceed. However, the mere existence of a state court
proceeding is not determinative of improper federal encroachment upon state
jurisdiction.”
Id. (internal citations and quotation marks omitted).
The Sixth
Circuit sets forth three additional sub-factors to provide additional guidance:
(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 underlying factual and legal
issues and state law and/or public policy, or whether federal common
or statutory law dictates a resolution of the declaratory judgment
action.
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Id. (citing Bituminous Cas. Corp. v. J & L Lumber Co., Inc., 373 F.3d 807, 814-15
(6th Cir. 2004)).
As explained in Part III.A of this Memorandum Opinion, resolution of this
case depends upon questions of both law and fact. To determine whether coverage
existed under the McMahans’ Westfield policies, the Court must delve into
ownership of Arthur McMahan’s powerboat, as well as the nature of its use at the
time of the accident.
The state court must examine these same issues in
determining whether Arthur McMahan’s estate is liable to the Reece estates. But
because the state court’s inquiry is broader than an insurance coverage dispute, the
scope of discovery will also be broader in that action. The state court is accordingly
in a better position to evaluate these factual issues than is this Court. Finally, the
third sub-factor focuses on whether the legal issues implicate important state
policies. The Sixth Circuit has recognized that state courts are in a better position
to resolve insurance disputes because they are more familiar with state law and
that because states regulate insurers, they are best suited to identify and enforce
the state public policies underlying those regulations. E.g., id. at 561; Bituminous,
373 F.3d at 815. All three sub-factors suggest that by exercising jurisdiction in this
case, this Court would run the risk of increasing friction between federal and state
courts.
D. Availability of Alternative Remedy
The fifth and final factor to be considered is whether a better or more
effective remedy is available to the declaratory action plaintiff. Grand Trunk, 746
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F.2d at 326.
Here, Kentucky law clearly provides an alternative remedy to
declaratory judgment in federal court by way of the Kentucky Declaratory
Judgment Act, KRS 418.040, or by allowing Westfield to intervene in the underlying
action. As the Eastern District of Kentucky has helpfully stated, “even though the
insurance company is not technically a party to, and the scope of the policy's
coverage is not yet at issue in, the underlying state-court litigation, it is preferable
for the state court to resolve the coverage dispute because it is ‘in a superior
position to resolve undecided questions of state law.’” Greenwich Insurance Co. v.
Hall, No. 11-66-ART, 2011 WL 3296067, at *2 (E.D. Ky. Aug. 1, 2011) (quoting
Flowers, 513 F.3d at 562). While this Court and the courts of the Commonwealth
are both capable of adjudicating this dispute, the state court would seem to be in a
better position to dispense an effective remedy here.
IV. Conclusion
“[I]n insurance coverage diversity cases . . . ‘declaratory judgment actions
seeking an advance opinion on indemnity issues are seldom helpful in resolving an
ongoing action in another court.’” Bituminous Cas. Corp. v. J & L Lumber Co., 373
F.3d 807, 812 (6th Cir. 2004) (quoting Manley, Bennett, McDonald & Co. v. St. Paul
Fire & Marine Ins. Co., 791 F.2d 460, 463 (6th Cir. 1986)). Here, four of the five
Grand Trunk factors weigh against the Court’s exercise of jurisdiction in this case,
and the fifth is neutral. Although the Sixth Circuit has not yet elucidated the
particular manner in which district courts should evaluate the Grand Trunk
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factors, this Court is satisfied that, on balance, this dispute is best left to the
province of the state court.
An appropriate order and judgment will follow.
May 1, 2017
CC: Counsel of Record
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