Famers Insurance Company of Arizona v. Castillo

Filing 17

MEMORANDUM OPINION AND ORDER by District Judge Martha Vazquez GRANTING 3 MOTION to Dismiss Or, In The Alternative, For A Stay of Proceedings. IT IS THEREFORE ORDERED that Defendant Steven Castillo's Motion to Dismiss, or, in the Alternative, for a Stay of Proceedings [Doc. 3 ] is GRANTED and the instant case is DISMISSED. (gr)

THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO

FARMERS INSURANCE COMPANY
OF ARIZONA,
Plaintiff,
v.

17-CV-389 MV/SCY

STEVEN CASTILLO,
Defendant.

MEMORANDUM OPINION AND ORDER
THIS MATTER comes before the Court on Defendant Steven Castillo’s Motion to
Dismiss, or, in the Alternative, for a Stay of Proceedings [Doc. 3]. Plaintiff Farmers Insurance
Company of Arizona filed a Response [Doc. 8] and Defendant filed a Reply [Doc. 10]. The Court,
having considered the Motion, briefs and relevant law, and being otherwise fully informed, finds
that the motion is well-taken and will be GRANTED.
BACKGROUND
On or about September 22, 2016, Steven Castillo was severely injured in a collision with
Susan Sanchez, an underinsured driver who was allegedly at fault. Doc. 3 at 1. Steven Castillo’s
reported injuries included lacerations, fractures of the tibia, pelvis and vertebrae, and damage to
his prostate, bladder, and urethra. Doc. 1 at ¶ 13. As a result, Mr. Castillo had to undergo several
surgeries.

Id.

Ms. Sanchez carried bodily injury coverage of $50,000.00 per person and

$100,000.00 per occurrence with Farmers Insurance Company. Doc. 3 at 1. On that same date,
Mr. Castillo and Bernice Castillo were named insureds and/or beneficiaries of two policies with
Farmers Insurance Company, each of which provided $100,000.00 per person and $300,000.00

per occurrence of liability coverage. Id. at 1-2. Mr. Castillo claims that he was entitled to stacked
Uninsured/Underinsured Motorist (UM/UIM) coverage equal to the bodily injury liability limits
of these policies. Doc. 1 at ¶ 15. Farmers alleges that the UM/UIM coverage was rejected when
Ms. Castillo signed a UM/UIM selection form on May 11, 2015 rejecting UM/UIM coverage in
its entirety for both policies. Id. at ¶¶ 6-11. However, Mr. Castillo claims that the UM/UIM
rejections are not enforceable because they were not attached to the policies delivered to Ms.
Castillo and because they predated the policies that were in effect at the time of the accident. Id.
at ¶ 17. Farmers disputes this, alleging that the rejections are enforceable and that it is not required
to reform the policies to include UM/UIM coverage equal to the bodily injury limits of the policies.
Id. at ¶ 18.
Plaintiff Farmers filed this lawsuit to invoke the jurisdiction of the federal court pursuant
to the Declaratory Judgment Act to interpret the policies and resolve the dispute as to whether the
UM/UIM rejections are enforceable. Id. at ¶¶ 3, 19. Specifically, Plaintiff requests that the Court
enter judgment declaring the rights and obligations of each party, declaring that the rejections of
the UM/UIM coverage on Mr. Castillo’s policies are enforceable and binding, and declaring that
Mr. Castillo is not entitled to UM/UIM coverage under said policies. Id. at ¶ 19. Defendant
Castillo then filed the instant Motion asking the Court to exercise its discretion to decline
jurisdiction in this matter due to a parallel action pending in the Second Judicial District Court of
New Mexico addressing the same issues presented in this case (“State Court Action”). Doc. 3 at
1. The State Court Action, filed by Mr. Castillo, names Farmers Insurance Company of Arizona
as a party and includes a declaratory action as well as extra-contractual claims. Id. at 4.
Specifically, Mr. Castillo’s state court case in Count I seeks a declaration that the policy did not

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contain a valid and binding rejection of UM/UIM coverage in an amount equal to his liability
limits, pursuant to Jordan v. Allstate Ins. Co., 245 P.3d 1214 (N.M. 2010). Id.
LEGAL STANDARD
Plaintiff’s Complaint is brought pursuant to the Declaratory Judgment Act under 28 U.S.C.
§ 2201. The Act states: “In a case of actual controversy within its jurisdiction, … any court of the
United States, upon the filing of an appropriate pleading, may declare the rights and other legal
relations of any interested party seeking such declaration, whether or not further relief is or could
be sought.” 28 U.S.C. § 2201 (emphasis added).
The Supreme Court of the United States has held that a district court’s exercise of
jurisdiction under the Act is strictly discretionary, and there is nothing “automatic or obligatory”
with respect to a federal court’s jurisdiction to hear a declaratory judgment action. Wilton v. Seven
Falls Co., 515 U.S. 277, 288 (1995) (citation omitted). The Supreme Court has found that even
where a district court had jurisdiction under the Act, “it was under no compulsion to exercise that
jurisdiction.” Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494 (1942); see also Kunkel v.
Cont’l Cas. Co., 866 F.2d 1269, 1273 (10th Cir. 1989) (quoting Pub. Affairs Assocs., Inc. v.
Rickover, 369 U.S. 111, 112 (1962) (“The Declaratory Judgment Act was an authorization, not a
command.”). In fact, the Supreme Court has cautioned against encroaching unnecessarily upon
state court litigation:
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 a state court
presenting the same issues, not governed by federal law, between the same parties.
Gratuitous interference with the orderly and comprehensive disposition of a state
court litigation should be avoided.
Brillhart, 316 U.S. at 495.

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The Tenth Circuit has also echoed this discretionary standard: “While the statute vests the
federal courts with power and competence to issue a declaration of rights,” the decision of whether
to exercise that power is “vested in the sound discretion of the district courts.” St. Paul Fire &
Marine Ins. Co. v. Runyon, 53 F.3d 1167 (10th Cir. 1995) (citing Pub. Affairs Assocs., 369 U.S. at
112); see also Kunkel, 866 F.2d at 1273 (citing Alabama State Fed’n of Labor v. McAdory, 325
U.S. 450, 462 (1945)) (“Whether to entertain a justiciable declaratory judgment action is a matter
committed to the sound discretion of the trial court.”). It is therefore the duty of the district court
to ascertain whether the issues presented “can better be settled in the proceeding pending in the
state court.” Brillhart, 316 U.S. at 495. A district court’s decision regarding whether to exercise
its jurisdiction and grant declaratory relief is reviewed for abuse of discretion. Wilton, 515 U.S. at
289-90.
DISCUSSION
The Tenth Circuit has adopted a five-factor test to determine whether a court should
exercise its discretionary jurisdiction over a declaratory judgment action where a parallel state
court action might address some or all of the issues set forth in the federal claim:
[1] whether a declaratory action would settle the controversy; [2] whether it would
serve a useful purpose in clarifying the legal relations at issue; [3] whether the
declaratory remedy is being used merely for the purpose of “procedural fencing” or
“to provide an arena for a race to res judicata”; [4] whether 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.
State Farm Fire & Cas. Co. v. Mhoon, 31 F.3d 979, 983 (10th Cir. 1994) (quoting Allstate Ins.
Co. v. Green, 825 F.2d 1061, 1063 (6th Cir. 1987)); see also Runyon, 53 F.3d at 1169; ARW
Exploration Corp. v. Aguirre, 947 F.2d 450, 454 (10th Cir. 1991). This Court has evaluated the

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Mhoon factors and finds that the factors weigh against the Court exercising its discretionary
jurisdiction over this declaratory judgment matter.
A. First and Second Mhoon Factors: Settling the Controversy & Clarifying the Legal Relations
The first two Mhoon factors deal with whether the declaratory action would settle the
controversy and serve a useful purpose in clarifying the legal relations. Id. Here, Plaintiff argues
that the first two factors of the Mhoon test weigh in favor of keeping the suit in federal court as it
will “settle the controversy and clarify the legal dispute.” Doc. 8 at 9. Specifically, Plaintiff
argues, it will clarify whether the UM/UIM selection forms that Ms. Castillo signed were required
to be attached to the insurance policies that were delivered to her in order for the selection of
reduced UM/UIM coverage to be legally enforceable. Id. Defendant, however, cites to United
States v. City of Las Cruces, which states that the first factor “is designed to shed light on the
overall question of whether the controversy would be better settled in state court.” 289 F.3d 1170,
1187 (10th Cir. 2002) (citing Brillhart, 316 U.S. at 495). Defendant also points out that the issues
raised in the federal action are matters of state law, and therefore argues that they should be decided
in state court. Doc. 10 at 3-4. With respect to the second factor, Defendant argues that because
the controversy is better decided in state court, the federal case serves no useful purpose. Id. at 4.
The Tenth Circuit has noted that the first two factors focus on the degree of similarity
between the federal and state proceedings, and that these factors “are necessarily driven by the
degree of identity of the parties and issues in the concurrent proceedings.” City of Las Cruces,
289 F.3d at 1183. Here, the parties are identical in the instant case and in the state action.
Furthermore, the issue presented in the federal case, requesting relief under the Declaratory
Judgment Act as to the enforceability of the UM/UIM rejection, is the same as the first of the six
claims asserted in the Complaint filed by Defendant Castillo in state court. See Doc. 3-1, Exhibit

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7. Therefore, the federal and state actions are parallel in that they involve the same parties and the
state action sets forth the same issue as the federal case, in addition to five other claims. In Mhoon,
the federal court decided to hear the case, but in that case, the state court action did not involve the
insurance company, but rather was a tort claim brought by another individual against Mhoon. 31
F.3d at 982-83. That court suggested that had State Farm been a party to the state court action, it
would have “obviat[ed] any need for an independent declaratory action and provid[ed] a simpler
and more efficient resolution of State Farm’s obligations towards Mhoon.” Id. at 984. The instant
case presents the very scenario envisioned by Mhoon, as Plaintiff is a party to the State Court
Action.
Furthermore, the state court has already resolved the sole issue presented in the instant
matter. In an Order entered on October 30, 2018, the Honorable Beatrice J. Brickhouse granted
Mr. Castillo’s Motion for Partial Summary Judgment on Count I, and explicitly stated: “the
UM/UIM rejection is not legally valid and binding. The policy shall be reformed to include
UM/UIM coverage in the amount of $100,000/$300,000 on each of two separate policies.” See
Doc. 16 at 4. This determination in state court has “obviate[ed] any need for an independent
declaratory action.” Mhoon, 31 F.3d at 984. Because a declaratory judgement by this Court would
not settle any unresolved controversy and would not clarify legal relations, the first two Mhoon
factors weigh strongly against exercising jurisdiction.
B. Third Mhoon Factor: Procedural Fencing
The third Mhoon factor is whether the declaratory remedy is being used merely for the
purpose of “procedural fencing.” 31 F.3d at 983. Plaintiff argues that this lawsuit was not filed
for purposes of procedural fencing because it did not file the federal complaint for five months
after it initially declined Defendant’s request that it reform the insurance policies to include higher

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UM/UIM coverage. Doc. 8 at 9. Plaintiff stated that during those five months, it was in
communication with defense counsel and it was only after defense counsel failed to provide any
argument as to why Curry v. Great NW. Ins. Co., 320 P.3d 482 (N.M. 2010) case was not
controlling on the coverage issue that it filed the instant lawsuit and sought the guidance of a
federal court in a declaratory judgment. Id. at 9-10. In response, Defendant argues that Plaintiff’s
“procedural fencing” is evidenced by its “dilatory tactics” and the filing of the federal lawsuit.
Doc. 10 at 4. Defendant posits that Plaintiff was aware that “absent its obstreperous and dilatory
tactics, Mr. Castillo would have filed his own Declaratory Action months ago.” Doc. 3 at 4.
The Tenth Circuit has held that a district court “may choose to avoid a declaratory judgment
action because the plaintiff is using the action for procedural fencing.” Runyon, 53 F.3d at 1170
(citing Franklin Life Insurance Co. v. Johnson, 157 F.2d 653, 656 (10th Cir. 1946)). Citing
Runyon, a court in this district stated that the procedural fencing factor “weighs against exercising
declaratory relief when the timing of the federal claim suggests that its main purpose is to delay
the state court action or receive a favorable judgment on an issue before the state court has a chance
to fully develop the facts.” West Am. Ins. Co. v. Atyani, 338 F. Supp. 3d 1227, 1233 (D.N.M.
2018).
Here, the instant Complaint was filed on March 30, 2017 [see Doc. 1], while the Complaint
in the state case was not filed until May 5, 2017 [see Doc. 3-1, Exhibit 7]. Therefore, because the
federal case was filed first, it cannot be said that the main purpose was to delay the State Court
Action. In Runyon, the court found it significant that the insurance company filed its federal suit
the day prior to the date that Runyon had promised to file his state court action against the
company. 53 F.3d at 1170. Similarly, in City of Las Cruces, the district court noted the fact that
the United States filed the federal action shortly after the state court rejected the final jurisdictional

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objection and “it became clear the [state court] adjudication [would] proceed to judgement.” 289
F.3d at 1189. Here, on the other hand, the state case was not pending at the time the federal action
was filed, and Defendant has not substantiated his assertion that Plaintiff engaged in procedural
fencing other than arguing that it used “dilatory tactics” in its prior communication. Accordingly,
this factor does not weigh against the Court exercising jurisdiction over the federal claim.
C. Fourth and Fifth Mhoon Factors: Friction between State and Federal Courts and Improperly
Encroaching Upon State Jurisdiction & Better or More Effective Alternative Remedy
The fourth and fifth Mhoon factors pertain to whether the federal court’s jurisdiction would
encroach on state jurisdiction, and whether an alternative remedy would be better or more
effective. 31 F.3d at 983. Plaintiff argues that although the state action involves more claims, the
additional bad faith and related claims are “premised on false allegations that seem to have been
interposed for the sole purpose of avoiding jurisdiction in federal court.” Doc. 8 at 10. Plaintiff
also argues that the instant case is purely a question of law and that Defendant’s argument that
there are facts in dispute that will require a determination by this Court is false. Id. Defendant,
on the other hand, argues that this case turns on New Mexico state law and public policy alone and
that there is no federal interest. Doc. 10 at 4.
“The final Mhoon factors are concerned with whether a declaratory judgment in federal
court would prevent the state court from determining the same issue or lead to friction between
two conflicting resolutions of the same dispute.” Atyani, 338 F.3d at 1233 (citing Brillhart, 316
U.S. at 495). Here, the controversy turns on the validity of the UM/UIM selection forms in the
insurance policies, which are governed by New Mexico state law. See Houston Gen. Ins. Co. v.
Am. Fence Co., Inc., 115 F.3d 805, 806 (10th Cir. 1997) (“The interpretation of an insurance
contract is governed by state law and, sitting in diversity, we look to the law of the forum state.”).
The Tenth Circuit has noted that “[a] federal court generally should not entertain a declaratory
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judgment action over which it has jurisdiction if the same fact-dependent issues are likely to be
decided in another pending proceeding.” Kunkel, 866 F.2d at 1276 (citing Brillhart, 316 U.S. at
495).
A declaratory judgment by this Court may lead to friction with the state court, as the court
in the State Court Action has already determined the sole issue before this Court, based upon the
very same facts presented here. [See Doc. 16]. Further, any declaratory judgment by this Court
undoubtedly would encroach on the state court’s jurisdiction, as this case turns solely on state law.
In finding that the federal case presented no interference with the state proceedings, the court in
Mhoon noted that the issue in the federal case “involved no matter, factual or legal, at issue in the
state case.” 31 F.3d at 984. The opposite is true here, where the determination of coverage under
the insurance policies is the precise issue raised by the parties in both the instant federal case and
the State Court Action. In City of Las Cruces, the court noted that water rights have traditionally
been “within the ambit of state court expertise.” 289 F.3d at 1190. Similarly here, a determination
of coverage depends on interpreting the relevant New Mexico statute, Section 66-5-301, NMSA
1978, and New Mexico case law, namely Jordan and Curry. Accordingly, the Court finds that the
fourth and fifth factors weigh against exercising jurisdiction and issuing a declaratory judgment.
CONCLUSION
Four out of the five Mhoon factors weigh against this Court exercising its jurisdiction in
presiding over the instant matter, brought under the Declaratory Judgment Act. For the foregoing
reasons, the Court will decline its discretionary jurisdiction. Because the exact issue before this
Court has already been resolved by the Honorable Beatrice J. Brickhouse in the state action, the
Court will accordingly grant Defendant’s Motion and dismiss, rather than stay, this action.

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IT IS THEREFORE ORDERED that Defendant Steven Castillo’s Motion to Dismiss,
or, in the Alternative, for a Stay of Proceedings [Doc. 3] is GRANTED and the instant case is
DISMISSED.

DATED this 27th day of March, 2019.

MARTHA VÁZQUEZ
United States District Judge

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