Sonoma Springs Limited Partnership et al v. Fidelity and Deposit Company of Maryland et al

Filing 53

ORDER that defendants' motion to stay this matter (ECF No. 30 ) is DENIED. Signed by Judge Larry R. Hicks on 8/23/2018. (Copies have been distributed pursuant to the NEF - LH)

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UNITED STATES DISTRICT COURT

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DISTRICT OF NEVADA

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SONOMA SPRINGS LIMITED
PARTNERSHIP, a Nevada limited
partnership; and SONOMA SPRINGS
ASSOCIATES, LLC, a Nevada limited
liability company,

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ORDER

Plaintiffs,

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***
Case No. 3:18-cv-00021-LRH-VPC

v.
FIDELITY AND DEPOSIT COMPANY OF
MARYLAND, a Maryland corporation; and
ZURICH AMERICAN INSURANCE
COMPANY OF ILLINOIS, a Maryland
corporation; and DOES 1-20, inclusive,

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Defendants.

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Defendants Fidelity and Deposit Company of Maryland (“Fidelity”) and Zurich

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American Insurance Company of Illinois (“Zurich”) move to stay this case in favor of a state

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court matter filed in the Sixth District Court of the State of Nevada in Humboldt County. ECF

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No. 30. Plaintiffs Sonoma Springs Limited Partnership (“Sonoma Springs”) and Sonoma Springs

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Associates, LLC (“Sonoma Associates”) filed a response, to which defendants replied. ECF

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Nos. 47, 51. The court now denies the motion.

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I.

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BACKGROUND
Sonoma Springs owns real property in Humboldt County, Nevada. ECF No. 1 at ¶ 10. In

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June 2015, Sonoma Springs contracted with Ascent Construction, Inc. (“Ascent”) to build an

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apartment complex on the property. Id. at ¶ 11. Ascent, as the contractor, was required to obtain
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a payment and a performance bond. Id. at ¶ 12. Ascent obtained two bonds from Fidelity and

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Zurich. Id. at ¶ 13–16. As the surety for the bonds, Fidelity and Zurich were jointly and severally

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liable and bound to the terms of the contract between Sonoma Springs and Ascent. Id. at ¶ 17.

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The bonds also required Fidelity and Zurich to assume Ascent’s obligations under the contract if

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Ascent were to breach the terms. Id. at ¶ 18. Sonoma Springs alleges that Ascent breached the

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terms of the contract. Id. at ¶ 19. Contrarily, Ascent claims that Sonoma Springs breached the

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contract. See ECF No. 30-1. After the contractual dispute arose between Sonoma Springs and

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Ascent, Sonoma Springs demanded multiple times that Fidelity and Zurich assume the

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contractual obligations as required by the bonds. Id. at ¶ 20–27. The demands were unsuccessful.

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Id. at ¶¶ 20–27.
Ascent sued Sonoma Springs and Sonoma Associates in the Sixth Judicial District Court

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of the State of Nevada for the County of Humboldt in May 2017. ECF No. 30-1. In the action

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(“state court action”), Ascent asserted six claims: breach of contract, foreclosure of mechanic’s

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lien, declaratory judgment for priority of encumbrances, violation of the implied covenant of

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good faith and fair dealing, unjust enrichment, and account stated. Id. Ascent also recorded a lien

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against the property. ECF No. 30 at 7; ECF No. 47 at 4. The lien has since been substituted for

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by a surety bond obtained from Hartford Fire Insurance Company. ECF No. 47 at 6.
Seven months later, in December 2017, Sonoma Springs and Sonoma Associates sued

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Fidelity and Zurich also in the Sixth Judicial District Court of the State of Nevada for the County

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of Humboldt. ECF No. 2, Ex. A. The suit includes seven claims: breach of contract, breach of

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implied covenant of good faith and fair dealing, breach of fiduciary duty, bad faith, violation of

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Nevada’s Unfair Claims and Settlement Practices Act, misrepresentation, and unjust enrichment.

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Id. Fidelity and Zurich removed the action to this court in January 2018. Id. They now move to

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stay this action pending the outcome of the state court action. ECF No. 30.

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II.

DISCUSSION
Fidelity and Zurich move to stay this matter under the Colorado River doctrine and under

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surety principles. The court addresses each in turn.

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A. Colorado River Doctrine

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The court first turns to the parties’ arguments under the Colorado River doctrine.

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“Generally ‘the pendency of an action in state court is no bar to proceedings concerning the same

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matter in the [f]ederal court having jurisdiction….’” Seneca Ins. Co., Inc. v. Strange Land, Inc.,

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862 F.3d 835, 841 (9th Cir. 2017) (quoting Colo. River Water Conservation Dist. v. United

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States, 424 U.S. 800, 817 (1976)). “Abstention from the exercise of federal jurisdiction is the

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exception, not the rule.” Colo. River, 424 U.S. at 813. Accordingly, a strong presumption against

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abstention generally governs. Seneca, 862 F.3d at 842. But still, “[i]n exceptional circumstances,

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a federal court may decline to exercise its ‘virtually unflagging obligation’ to exercise federal

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jurisdiction, in deference to pending, parallel state proceedings.” Montanore Minerals Corp. v.

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Bakie, 867 F.3d 1160, 1165 (9th Cir. 2017), as amended on denial of reh'g and reh'g en

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banc (Oct. 18, 2017) (quoting Colo. River, 424 U.S. at 817). If exceptional circumstances exist,

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the Ninth Circuit “generally require[s] a stay rather than a dismissal[,]” which “ensures the

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federal forum will remain open if for some unexpected reason the state forum turns out to be

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inadequate.” Id. (quoting Attwood v. Mendocino Coast Dist. Hosp., 886 F.2d 241, 243 (9th Cir.

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1989)) (internal quotation marks and punctuation marks omitted).

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Federal courts balance the following eight factors when determining whether to stay or
dismiss a matter under the Colorado River doctrine:

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(1) which court first assumed jurisdiction over any property at stake; (2) the
inconvenience of the federal forum; (3) the desire to avoid piecemeal litigation;
(4) the order in which the forums obtained jurisdiction; (5) whether federal law or
state law provides the rule of decision on the merits; (6) whether the state court
proceedings can adequately protect the rights of the federal litigants; (7) the desire
to avoid forum shopping; and (8) whether the state court proceedings will resolve
all issues before the federal court.

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Id. at 1166 (citing R.R. St. & Co. Inc. v. Transp. Ins. Co., 656 F.3d 966, 978–79 (9th Cir. 2011)).

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But a court must not apply the factors as a “mechanical checklist;” the court must instead apply

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the factors in “a pragmatic, flexible manner with a view to the realities of the case at hand.”

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Seneca, 862 F.3d 835, 842 (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460

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U.S. 1, 16, 21 (1983)). The balancing of the factors begins “with the balance heavily weighted in

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favor of the exercise of jurisdiction.” Id.

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To decide if this matter should be stayed in deference to the state court action, the court

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considers the eight Colorado River factors. The court begins by disposing of the second and the

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seventh factor. The second factor is inconsequential to the court’s decision because the state

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court forum and the federal court are equally convenient. Both are located in Northern Nevada, a

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short distance from one another. Likewise, the seventh factor is inapplicable because forum

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shopping is not an issue here. The remaining six factors merit further discussion. The court

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therefore discusses each in turn below.

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1. Jurisdiction of Property
The first Colorado River factor considers which court, if any, first assumed jurisdiction

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over a property. Montanore, 867 F.3d at 1166. The factor is dispositive. Id. The court must stay

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an in rem or quasi in rem action in federal court if a state court assumed jurisdiction over the at-

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issue property first. Id. The court must also stay an action if “it involve[s] the same question as

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the in rem [state court] claim, and could be resolved in state court.” Id. at 1167 (internal

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quotations omitted). But the first Colorado River factor does not demand a stay when there is no

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threat of inconsistent dispositions of a single property. Seneca, 862 F.3d at 842.

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The first factor does not require the court to stay this action because there is no possibility

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of inconsistent dispositions of the property implicated in the state court action. While the state

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court action includes a claim for foreclosure of a mechanic’s lien and a claim for declaratory

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judgment for priority of encumbrances, the state court action does not involve an actual dispute

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of ownership over the property. Further, this action focuses on Fidelity and Zurich’s obligations

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under the bonds. It is true the bonds relate to the property implicated in the state court action. But

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interpreting the terms of the bonds in this matter to determine the parties’ responsibilities poses

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no threat of inconsistent disposition of the property. Thus, the first Colorado River factor does

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favor staying this matter.

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2. Piecemeal Litigation
Turning to the third Colorado River factor, the court considers the possibility of

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piecemeal litigation. “Piecemeal litigation occurs when different tribunals consider the same

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issue, thereby duplicating efforts and possibly reaching different results.” Am. Int’l Underwriters
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(Philippines), Inc. v. Cont’l Ins. Co., 843 F.2d 1253, 1258 (9th Cir. 1988). Concerns over

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piecemeal litigation support a stay if exceptional circumstances exist. Travelers Indem. Co. v.

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Madonna, 914 F.2d 1364, 1368–69 (9th Cir. 1990). The exceptional circumstances must “justify

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special concern[s] about piecemeal litigation.” Id. at 1369. This factor does not support a stay in

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the absence of exceptional circumstances because “conflicting results, piecemeal litigation, and

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some duplication of judicial effort is the unavoidable price of preserving access to … federal

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relief.” Neuchatel Swiss Gen. Ins. v. Lufthansa Airlines, 925 F.2d 1193, 1195 (9th Cir. 19991)

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(quotations omitted). Exceptional circumstances include “federal legislation evincing a federal

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policy to avoid piecemeal litigation” or the existence of a “vastly more comprehensive state

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action[.]” Travelers, 914 F.2d at 1369.
The third Colorado River factor does not favor staying this matter because there are no

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exceptional circumstances to justify withholding federal jurisdiction. It is not enough that the two

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actions involve similar facts and issues; exceptional circumstances must exist. Here, Fidelity and

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Zurich do not identify exceptional circumstances that would make the state court action “vastly

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more comprehensive” than this action. Thus, the factor does not favor a stay.
3. Order of Jurisdiction

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The fourth Colorado River factor questions the order in which the courts obtained

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jurisdiction. But “priority should not be measured exclusively by which complaint was filed

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first.” Cone, 460 U.S. at 21. It instead should be measured “in terms of how much progress has

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been made in the two actions.” Id.

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Here, the state court action was initiated several months before this action. It is also in the

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discovery process and has seen motion practice. See ECF No. 30 at 17. Because the state court

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action was filed first and has progressed further than this action, the fourth Colorado River factor

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favors a stay.

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4. Source of Law
The court now turns to the fifth Colorado River factor: the source of law that will provide

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the rule of decision on the merits. When an action involves claims governed by state law, a stay

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may be favored “only ‘in some rare circumstances.’” Seneca, 862 F.3d at 844 (quoting Cone,
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460 U.S. at 26). The state law must present “complex and difficult issues [that would be] better

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resolved by a state court” in order for this factor to favor a stay of federal jurisdiction; “it is not

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enough that a state law case is complex because it involves numerous parties or claims.” Id.

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The fifth Colorado River factor does not favor a stay. While this action involves only

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state law claims, the claims are frequently heard in federal court. See Montanore, 867 F.3d at

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1168 (identifying breach of contract, misrepresentation, and breach of fiduciary duty as routine

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claims). The claims do not present any complex or difficult issues that should be reserved for

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decision by a state court. Thus, the fifth factor does not favor a stay.

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5. Adequacy of State Court
The sixth Colorado River factor questions the adequacy of the state court in protecting

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federal rights. Travelers, 914 F.2d at 1370. “When it is clear that the state court has authority to

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address the rights and remedies at issue[,] this factor may weigh in favor of a stay. However, this

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factor is more important when it weighs against a stay.” Montanore, 867 F.3d at 1160 (internal

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citations omitted).

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This factor does not affect the court’s decision because no federal rights are at issue. Both

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actions instead involve only state law claims. As a result, this factor does not disfavor a stay.

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Because it does not weigh against a stay, it does not substantially affect the court’s decision.

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6. Parallelism
The final Colorado River factor considers the parallelism between the two actions.

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“Though exact parallelism is not required, substantial similarity of claims is necessary before

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abstention is available.” Seneca, 862 F.3d at 845. “[T]he existence of a substantial doubt as to

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whether the state proceedings will resolve the federal action precludes a Colorado River stay or

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dismissal.” Id. (internal quotations omitted). The factor is most relevant “when it counsels

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against abstention, because while … insufficient parallelism may preclude abstention, the

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alternative[] never compel[s] abstention.” Id. In fact, “sufficiently similar claims are a necessary

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precondition to Colorado River abstention and should not, absent more, add weight to the

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balance in favor of abstention.” Id. The state court action must “ensure comprehensive

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disposition of litigation.” R.R. St., 656 F.3d at 982.
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Here, the two actions do not involve the same parties. While Sonoma Springs and

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Sonoma Associates are parties in both actions, Ascent is not a party in the federal action, and

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Fidelity and Zurich are not parties in the state action. While the two actions both stem from an

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alleged breach of the contractual relationship between Sonoma Springs and Ascent, the focus of

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the state court action is on the contractual obligations between Sonoma Springs and Ascent,

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while the federal action focuses upon the obligations between Fidelity and Zurich to Sonoma.

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While both actions focus upon the contractual relationship between Sonoma Springs and Ascent,

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the inquiry does not end there and does not counsel in favor of abstention.
But even taking the similarity of the contractual relationship between Sonoma Springs

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and Ascent into account, there are numerous factors that weigh against abstention by this court.

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The parties are not the same in the two actions and there are potential outcomes which may have

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no significant relevance to the action before this court: dismissal, settlement, affirmative

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defenses and other potential results unrelated to the issues before this court. Moreover, primarily

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because of the differences in parties, a judgment in the state court may well not be controlling or

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persuasive in the federal court. As a result, the state court action simply does not ensure

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comprehensive disposition of the litigation in this court. Thus, the final Colorado River factor

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weighs strongly against a stay.
Based on the above analysis of the Colorado River factors and the subsequent balancing

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of the factors, the court holds that a stay is not warranted in this matter under the Colorado River

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doctrine.

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B. Surety Principles

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The court now turns to the parties’ arguments regarding surety principles. Fidelity and

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Zurich cite to Brinderson-Newberg Joint Venture v. Pacific Erectors, Inc., 971 F.2d 272, 283

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(9th Cir. 1992) to argue that a surety “has every right to await the outcome of the liability dispute

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before paying on the performance bond.” ECF No. 30 at 20. Thus, they argue that this matter

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must be stayed. Id.

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But Brinderson does not stand for the proposition that a federal court must stay its

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jurisdiction in favor of a parallel state court action. See 971 F.2d 272. It instead stands for the

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proposition that a bad faith claim against a surety fails as a matter of law if a surety failed to

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investigate claims under a bond when a genuine dispute over liability existed. Id. at 283. Thus,

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Brinderson does not mandate a stay in this matter. Its principles instead relate only to the bad

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faith claims brought against Fidelity and Zurich. Under Brinderson, if a genuine dispute of

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liability exists, the bad faith claims against Fidelity and Zurich would fail as a matter of law. The

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court declines to extend the holding in Brinderson any further.

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III.

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CONCLUSION
IT IS THEREFORE ORDERED that defendants’ motion to stay this matter (ECF No. 30)

is DENIED.

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IT IS SO ORDERED.

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DATED this 23rd day of August, 2018.

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LARRY R. HICKS
UNITED STATES DISTRICT JUDGE

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