Federated Mutual Insurance Company v. Shernaman Enterprises, Inc. et al

Filing 68

MEMORANDUM AND ORDER -...IT IS HEREBY ORDERED that defendants' Motion to Dismiss or to Stay Proceedings on the basis of Wilton abstention is GRANTED to the extent the Court will abstain from this case, and the matter is hereby STA YED. [Doc. 19] IT IS FURTHER ORDERED that all other pending motions are DENIED without prejudice. [Docs. 22,43,46,48,54,66] IT IS FURTHER ORDERED that plaintiff's request for oral argument is DENIED. IT IS FURTHER ORDERED t hat the Clerk of the Court shall administratively close this case, which may be reopened on the motion of any party. Any motion to reopen shall include a statement of all relevant proceedings that have occurred in the equitable garnishment action in the Circuit Court for the City of St. Louis, State of Missouri.. Signed by District Judge Charles A. Shaw on 12/2/2014. (MRC)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION

FEDERATED MUTUAL INSURANCE
COMPANY,
Plaintiff,
v.
SHERNAMAN ENTERPRISES, INC., et al.,
Defendants.

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No. 4:14-CV-265 CAS

MEMORANDUM AND ORDER
This matter is before the Court on defendants Shernaman Enterprises, Inc. (“Shernaman”)
and Daniel T. McCullen’s (collectively “defendants”) Motion to Dismiss or Stay Proceedings.
Plaintiff Federated Mutual Insurance Company (“Federated”) opposes the motion and it is fully
briefed. For the following reasons, the defendants’ motion will be granted to the extent that the
Court in the exercise of its discretion will abstain from and stay this case.
I. Background
This is a declaratory judgment action. Plaintiff Federated’s complaint alleges that it issued
a Commercial Package Policy and a Commercial Umbrella Liability Policy (collectively the
“Federated Policies”) to Shernaman for the period March 1, 2006 to March 1, 2007. The case arises
out of a lawsuit filed by defendant McCullen on September 22, 2011 in the Circuit Court of St.
Louis County, Missouri, captioned Daniel T. McCullen v. Shernaman Enterprises, Inc., d/b/a Pro
Cycle and American Honda Motor Co., Inc. (“the Underlying Suit”). The instant action was filed
on February 14, 2014. The complaint seeks declarations that Federated has no obligation under
either the Commercial Package Policy or the Commercial Umbrella Liability Policy to defend

Shernaman in connection with the Underlying Suit, or to indemnify Shernaman in connection with
any settlement or judgment in the Underlying Suit.
The Petition in the Underlying Suit alleged that McCullen sustained injuries as a result of
the improper design and manufacture of a 2003 Honda motorcycle he purchased from Shernaman.
The Petition alleged strict liability and negligence claims against American Honda Motor Co.
(“Honda”) and a negligence claim against Shernaman. Shernaman’s registered agent was served
with the Petition and Summons in the Underlying Suit on October 21, 2011. On November 13,
2013, Honda was dismissed from the Underlying Suit without prejudice and, on December 4, 2013,
McCullen filed a motion for default against Shernaman based on its failure to timely answer.
Federated alleges it first received notice of the Underlying Suit from Shernaman on January 6, 2014,
and retained defense counsel to represent Shernaman and oppose the motion for default. On January
24, 2014, the state court denied Shernaman’s motion for additional time to plead in response to the
Petition.
Federated informed Shernaman it would defend the Underlying Suit subject to a reservation
of the right to deny coverage on the grounds that Shernaman breached its obligations under the
Federated Policies to provide timely notice of the Underlying Suit. Shernaman refused to accept
Federated’s defense under a reservation of rights and on February 1, 2014 entered into a settlement
agreement (the “Settlement Agreement”) with McCullen pursuant to § 537.065, Missouri Revised
Statutes (2000). The Settlement Agreement includes a covenant by McCullen to limit his judgment
execution rights to the coverage available under the Federated policies. The Settlement Agreement
also provided that the Underlying Suit would proceed to a bench trial on all issues of liability and
damages. Federated filed a motion to intervene in the Underlying Suit on February 3, 2014, and

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filed the instant declaratory judgment action on February 14, 2014. Federated’s motion to intervene
in the Underlying Suit was denied on February 19, 2014.1
Judgment was entered against Shernaman in the Underlying Suit on April 24, 2014.
McCullen as judgment creditor filed an equitable garnishment action against Federated on May 28,
2014 in the Circuit Court for the City of St. Louis, State of Missouri, seeking coverage and the right
to recover and collect on the Federated policies. In accordance with Missouri law, McCullen’s
equitable garnishment action was filed after the expiration of thirty days from the date of the
judgment, and also named the insured, Shernaman, as a defendant. See § 379.200, Mo. Rev. Stat.
(2000).
A Case Management Order was issued in this case on May 8, 2014. Discovery has taken
place both in this case and the equitable garnishment action. The defendants filed the instant Motion
to Dismiss or Stay Proceedings on October 3, 2014. Subsequently, on October 24, 2014 Federated
filed a motion for summary judgment on the issue of late notice. According to information supplied
by the parties and Missouri Case.net,2 on November 19, 2014, the state court heard argument on
McCullen’s motion to compel discovery from Federated in the equitable garnishment action, and
agreed to conduct an in camera review of sixty documents that Federated asserted were protected
from discovery as work product, attorney-client privileged, or confidential/proprietary business
information. The state court also agreed to review Federated’s privilege log that listed documents

1

See docket sheet in McCullen v. Shernaman Enterprises, et al., No. 11SL-CC03810 (21st
Jud. Cir.), available at https://www.courts.mo.gov/casenet/cases/searchDockets.do) (last visited Dec.
1, 2014).
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See docket sheet in McCullen v. Federated Mutual Insurance Company, et al., No. 1422CC01219 (22nd Jud. Cir.), available at https://www.courts.mo.gov/casenet/cases/searchDockets.do)
(last visited Dec. 1, 2014).
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Bates-labeled 1 through 876. On November 25, 2014, the parties came before this Court for a
hearing on two motions to compel filed by Shernaman and McCullen. At the hearing, the parties
informed the Court that the information sought by the motions to compel was also the subject of
McCullen’s motion to compel under submission before the state court judge.
II. The Wilton/Brillhart Standard
The Declaratory Judgment Act confers on federal courts “unique and substantial discretion
in deciding whether to declare the rights of litigants.” Wilton v. Seven Falls Co., 515 U.S. 277, 286
(1995). The statute provides that a court “may declare the rights and other legal relations of any
interested party seeking such declaration,” id. (quoting 28 U.S.C. § 2201(a)). The Declaratory
Judgment Act is “an enabling Act, which confers a discretion on the courts rather than an absolute
right upon the litigant.” Id. at 287 (quoting Public Serv. Comm’n of Utah v. Wycoff Co., 344 U.S.
237, 241 (1952)).
In Wilton, the Supreme Court reaffirmed the application of Brillhart v. Excess Insurance Co.
of America, 316 U.S. 491 (1942), to a declaratory judgment action:
Over 50 years ago, in Brillhart . . . , this Court addressed circumstances virtually
identical to those present in the case before us today. An insurer, anticipating a
coercive suit, sought a declaration in federal court of nonliability on an insurance
policy. The District Court dismissed the action in favor of a pending state
garnishment proceedings, to which the insurer had been added as a defendant . . .
[T]his Court held that, “although the District Court had jurisdiction of the suit under
the Federal Declaratory Judgments Act, it was under no compulsion to exercise that
jurisdiction.” The Court explained that “ordinarily it would be uneconomical as well
as vexatious for a federal court to proceed in a declaratory judgment suit where
another suit is pending in state court presenting the same issues, not governed by
federal law, between the same parties.” The question for a district court presented
with a suit under the Declaratory Judgment Act, the Court found, is “whether the
questions in controversy between the parties to the federal suit, and which are not
foreclosed under the applicable substantive law, can better be settled in the
proceeding pending in the state court.”
Wilton, 515 U.S. at 282 (quoting Brillhart) (internal citations and brackets omitted).
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The Declaratory Judgment Act gives district courts discretion to determine whether to
exercise jurisdiction in a declaratory judgment action or to abstain in favor of a parallel state court
proceeding. See Capitol Indem. Corp. v. Haverfield, 218 F.3d 872, 874 (8th Cir. 2000) (citing
Wilton, 515 U.S. at 289-90). The Eighth Circuit has instructed that a district court’s “key
consideration . . . is ‘to ascertain whether the issues in controversy between the parties to the federal
action . . . can be better settled by the state court’ in light of the ‘scope and nature of the pending
state court proceeding.’” Evanston Ins. Co. v. Johns, 530 F.3d 710, 713 (8th Cir. 2008) (quoting
Capitol Indemnity, 218 F.3d at 874) (citing Brillhart, 316 U.S. at 495). If the issues would be better
settled in the pending state court proceeding, “the district court must dismiss the federal action
because ‘it would be uneconomical as well as vexatious for a federal court to proceed in a
declaratory judgment suit where another suit is pending in a state court presenting the same issues,
not governed by federal law, between the same parties.’” Capitol Indemnity, 218 F.3d at 874-75
(quoting Brillhart, 316 U.S. at 495).
III. Discussion
Defendants Shernaman and McCullen assert that this action and the Underlying Suit are
parallel because the parties and claims are the same, the claims are premised on the same issues, and
there are no issues of federal law. Defendants argue the Court should exercise its discretion under
the Wilton abstention doctrine to dismiss this action in favor of the Underlying Suit.
Federated responds that Wilton abstention is inapplicable because this action and the
Underlying Suit are not parallel, as the state court equitable garnishment action was not on file at
the time Federated filed this declaratory judgment action in federal court. Federated asserts that as
a result, the Court in resolving the motion to dismiss or stay must instead apply the six-factor test
set forth in Scottsdale Insurance Co. v. Detco Industries, Inc., 426 F.3d 994 (8th Cir. 2005).
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Federated also argues that even if the Wilton standard were applicable, abstention is inappropriate
under the specific facts of this case for several reasons: the federal suit was filed first; there is no
risk of inconsistent rulings because the applicable state law is well settled; the summary judgment
motion it filed in this case “will be decided shortly and will resolve all issues in both this case and
in the state court proceeding,” Pl.’s Mem. Opp. at 11; the federal suit is more comprehensive
because the state court’s jurisdiction in the garnishment action is limited to Federated’s policy limits
of $5.5 million, whereas Federated seeks a declaration in the federal suit that it has no obligation to
pay any of the $11 million judgment from the Underlying Suit;3 and defendants’ decision to seek
dismissal of this action is a procedural maneuver to obtain what they perceive to be an advantage
of proceeding in state court, because they filed the motion to dismiss “just days after their motion
to change judges in the state court proceeding was granted,” after “aggressive[ly] participati[ng]”
in this case for months. Id.
Defendants reply that Federated misstates the issues and holdings of the Eighth Circuit’s
Scottsdale decision. Defendants state that Scottsdale addressed the extent of a federal court’s
discretion to abstain from jurisdiction over a declaratory judgment action in the absence of parallel
state proceedings, and did not hold that suits are not parallel if the federal court action is filed prior
to the state proceeding. Defendants assert that this action and the state equitable garnishment action
are parallel and are in an equivalent posture, as no depositions have been taken in either case and
similar discovery has been undertaken. Defendants dispute Federated’s assertion that the state
court’s jurisdiction is limited to the policy limits, citing the Missouri Supreme Court’s statement,
“The insurer that wrongly refuses to defend is liable for the underlying judgment as damages

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Federated does not cite any case law in support of its assertion that the state court’s
jurisdiction is limited in the manner it argues.
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flowing from its breach of its duty to defend.” Columbia Cas. Co. v. HIAR Holding, L.L.C., 411
S.W.3d 258, 265 (Mo. 2013) (en banc). Finally, defendants reply that the Court should disregard
Federated’s argument concerning the pendency of its summary judgment motion, because the
motion is premature and was filed as a matter of “procedural fencing” as no depositions have been
taken and initial written discovery is incomplete.
The Eighth Circuit has explained that “[s]uits are parallel if ‘substantially the same parties
litigate substantially the same issues in different forums.’” Scottsdale, 426 F.3d at 997 (quoting
New Beckley Mining Corp. v. International Union, United Mine Workers of America, 946 F.2d
1072, 1073 (4th Cir. 1991)). As stated above, Federated contends that under Scottsdale, the Wilton
abstention doctrine does not apply where there is no parallel state proceeding pending as of the date
the federal declaratory judgment action is filed. This contention is without merit. Scottsdale
addressed the extent of a federal court’s discretion to abstain from jurisdiction over a declaratory
judgment action in the absence of parallel state proceedings, but it did not hold that suits are not
parallel if the federal court action is filed prior to the state proceeding. 426 F.3d 997-98. The timing
of the suits was not at issue in Scottsdale.
Federated’s argument is also undercut by the Supreme Court’s decision in Wilton itself, and
by other Eighth Circuit precedent. In Wilton, the petitioner filed a federal declaratory judgment
action in February 1993, and the respondent filed a state court action a month later in March 1993.
515 U.S. at 280. The Supreme Court held that the discretionary standard it articulated in Brillhart,
316 U.S. 491, should be applied by district courts in determining whether to entertain an action
under the Declaratory Judgment Act, and that the district court did not abuse its discretion in staying
the action for declaratory relief where “parallel proceedings, presenting opportunity for ventilation
of the same state law issues, were underway in state court.” 515 U.S. at 290. This was so even
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though the state court action was not pending when the federal declaratory judgment action was
filed.
Similarly, in Capitol Indemnity, 218 F.3d 872, the Eighth Circuit held that the district court
abused its discretion in denying a motion to dismiss or stay a federal declaratory judgment action
in favor of a parallel state court proceeding, even though the declaratory judgment action was filed
several months prior to the state suit. Id. at 873-74; 876. See also Royal Indem. Co. v. Apex Oil
Co., 511 F.3d 788, 792 (8th Cir. 2008) (affirming district court’s decision to apply Brillhart/Wilton
abstention analysis where the parties to the state and federal actions “were the same at the time th[e]
appeal was submitted”); James River Ins. Co. v. Impact Strategies, Inc., 699 F.Supp.2d 1086, 1089
(E.D. Mo. 2010) (citing Royal Indemnity, rejecting argument that “under Scottsdale, the issue
whether state and federal suits are parallel is determined as of the date the federal court declaratory
judgment action was filed.”); United Financial Cas. Co. v. Shelton, 2013 WL 771827, at *3 (W.D.
Ark. Feb. 28, 2013) (holding that under Royal Indemnity, the “Brillhart/Wilton abstention analysis
is properly based on the state of proceedings as they presently exist, adopting a time-of-abstention
rule.”).
Having determined that the date the state court suit was filed is not determinative of the
issue, the Court proceeds to an examination of the relevant Brillhart factors to determine whether
it should abstain from this matter. The state court equitable garnishment action and the instant
action are parallel, as both involve the same parties and include similar claims concerning the
parties’ rights and responsibilities under the Federated policies. Indeed, Federated does not argue
that the suits are not parallel. As a result, the Court has discretion to determine whether to exercise
jurisdiction over this action or to abstain in favor of the equitable garnishment action. See Capitol
Indem. Corp., 218 F.3d at 874. The Court must determine whether the issues in controversy among
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the parties “can be better settled by the state court” in light of the “scope and nature of the pending
state court proceeding.” Id.
“[T]he normal principle that federal courts should adjudicate claims within their jurisdiction
yields to considerations of practicality and wise judicial administration.” Wilton, 515 U.S. at 288.
The principle of “wise judicial administration” weighs in favor of declining to exercise discretionary
jurisdiction over this action. Because this action and the equitable garnishment action are parallel,
allowing both actions to proceed runs the risk of inconsistent rulings and would be uneconomical
and vexatious for the parties and a waste of judicial resources. Further, the interpretation and
application of the Federated policies is purely a matter of state law and there are no federal defenses
or claims. The Court rejects Federated’s unsupported argument that the state court’s jurisdiction is
limited to the policy proceeds and finds that all of the issues pending among the parties can be
satisfactorily adjudicated in the equitable garnishment action.
Federated’s argument that abstention is inappropriate because this case is more procedurally
advanced than the state court equitable garnishment action is unpersuasive. This case has been
pending since February 2014. Under the Case Management Order (Doc. 15) issued in May 2014,
the discovery completion deadline in this case remains more than six months away, dispositive
motions are not due until July 1, 2015 and the trial date is October 26, 2015. Federated’s motion
for summary judgment, filed three weeks after defendants filed their motion to dismiss or stay this
action, appears to be premature based on the similar motions to compel pending in this case and the
equitable garnishment action. Further, the existence of parallel discovery disputes before this Court
and the state court highlights the risk of inconsistent rulings in the two cases, and the potential waste
of judicial resources.

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Having considered these factors, the Court concludes that the parties’ disputes can be better
settled by the state court in light of the “scope and nature of the pending state court proceeding,” see
Capitol Indemnity, 218 F.3d at 874, and therefore abstention is warranted. The Court further
concludes that this case should be stayed rather than dismissed. “[W]here the basis for declining
to proceed is the pendency of a state proceeding, a stay will often be the preferable course, because
it assures that the federal action can proceed without risk of a time bar if the state case, for any
reason, fails to resolve the matter in controversy.” Wilton, 515 U.S. at 288 n.2.
IV. Conclusion
For the foregoing reasons, the Court concludes in the exercise of its discretion that the issues
raised by this action would be better addressed in the equitable garnishment action pending in state
court. As a result, the Court will grant defendants’ motion to dismiss or stay proceedings to the
extent it will stay this action in favor of the equitable garnishment action. All other pending motions
will be denied without prejudice.
Accordingly,
IT IS HEREBY ORDERED that defendants’ Motion to Dismiss or to Stay Proceedings on
the basis of Wilton abstention is GRANTED to the extent the Court will abstain from this case, and
the matter is hereby STAYED. [Doc. 19]
IT IS FURTHER ORDERED that all other pending motions are DENIED without
prejudice. [Docs. 22, 43, 46, 48, 54, 66]
IT IS FURTHER ORDERED that plaintiff’s request for oral argument is DENIED.
IT IS FURTHER ORDERED that the Clerk of the Court shall administratively close this
case, which may be reopened on the motion of any party. Any motion to reopen shall include a

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statement of all relevant proceedings that have occurred in the equitable garnishment action in the
Circuit Court for the City of St. Louis, State of Missouri.

CHARLES A. SHAW
UNITED STATES DISTRICT JUDGE

Dated this 2nd day of December, 2014.

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