BEAUFORT DEDICATED NO. 5 LIMITED ON BEHALF OF SYNDICATE 1318 AT LLOYD'S, et al v. BRADLEY
Filing
18
MEMORANDUM OPINION AND ORDER signed by JUDGE THOMAS D. SCHROEDER on 8/8/2012; that: 1. Bradley's motion to dismiss pursuant to Rules 12(b)(7)and 19 (Doc. 4 ) is DENIED. 2. Bradley's Motion to Stay, as renewed by his Objection to S econd Amended Complaint and Motion to Stay Proceedings Pursuant to Federal Rules 12(b)(7) and 19 (Docs. 4 , 17 ), is GRANTED, and this action shall be STAYED pending further order of the court. 3. Bradley's Objection to Amended Com plaint and Motion to Stay Proceedings Pursuant to Federal Rules 12(b)(7) and 19 (Doc. 12 ) is DENIED AS MOOT. 4. Bradley's motion to stay the time to file answer (Doc. 17 ) is GRANTED and shall extend until twenty (20) days after the lifting of the stay imposed by this Order. 5. The parties are directed to file joint, written status reports concerning the progress of the state-court case every two months, beginning October 1, 2012. (Sheets, Jamie)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
BEAUFORT DEDICATED NO. 5
LIMITED, ON BEHALF OF
SYNDICATE 1318 AT LLOYD’S,
and BEAUFORT DEDICATED NO. 2
LIMITED ON BEHALF OF SYNDICATE
318 AT LLOYD’S,
Plaintiffs,
v.
ROBERT BRADLEY,
Defendant.
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1:11-cv-673
MEMORANDUM OPINION AND ORDER
THOMAS D. SCHROEDER, District Judge.
This case involves a dispute over insurance coverage for
damage resulting from a broken water pipe in a residence located
in Durham, North Carolina (“the Property”).
Plaintiffs, two
syndicates
action
rescission
at
of
Lloyd’s
their
London,
insurance
filed
policy
this
for
the
Property
seeking
and
a
declaratory judgment that they have no duty to indemnify the
loss
under
various
theories
limitation of liability.
(“Bradley”),
one
of
the
of
(Doc. 1.)
alleged
concealment,
fraud,
and
Defendant Robert Bradley
owners
of
the
Property, now
moves to dismiss this case pursuant to Federal Rules of Civil
Procedure 12(b)(7) and 19 for failure to join necessary parties
or, in the alternative, to stay it pending the outcome of a
related state-court proceeding he and other Property owners have
since filed against Plaintiffs and other allegedly responsible
parties.
court
(Doc. 4.)
held
a
hearing
Following briefing by the parties, the
on
July
13,
2012,
and
at
the
court’s
invitation Plaintiffs filed a second amended complaint on July
23, 2012, to address subject matter jurisdiction concerns raised
by the court.
(Doc. 16.)
Bradley responded on July 30, 2012,
renewing his motion to dismiss or stay. 1
(Doc. 17.)
is
reasons
now
ripe
for
decision.
For
the
The matter
stated
below,
Bradley’s motion to dismiss will be denied but his motion to
stay will be granted.
I.
BACKGROUND
Plaintiffs’ current complaint 2 alleges the following:
1
Bradley also filed an “Objection to [First] Amended Complaint and
Motion to Stay Proceedings Pursuant to Federal Rules 12(b)(7) and 19,”
which renewed his earlier motion to dismiss (Doc. 4).
(Doc. 12.)
Because Plaintiffs subsequently filed a second amended complaint,
Bradley’s objection (Doc. 12) is moot.
2
The court sua sponte raised the question whether the original
complaint invoked the court’s diversity jurisdiction, and the court
permitted Plaintiffs to amend it twice to sufficiently allege the
citizenship
of
the
parties
to
satisfy
the
court’s
inquiry.
Plaintiffs’ second amended complaint alleges the citizenship of all
parties, including the “names” (members) of Plaintiffs, and the court
is now satisfied they are diverse in that all Plaintiffs (and their
names) are a combination of aliens and citizens of states other than
North Carolina, and Bradley is a citizen of North Carolina.
Bradley
also argues that Plaintiffs have failed to meet the required amount in
controversy because if they are successful, they would only be
required to return Bradley’s $3,551.35 premium.
(Doc. 13 at 5, 6.)
However, in actions seeking declaratory relief, “it is well
established that the amount in controversy is measured by the value of
the object of the litigation.”
Hunt v. Wash. State Apple Adver.
Comm’n, 432 U.S. 333, 347 (1977) (citing cases).
“When an insurer
2
On
July
10,
2009,
Bradley
submitted
an
application
for
insurance on the Property, which he represented was a dwelling
rented
as
a
primary
residence.
(Doc.
16
¶
application was submitted on July 10, 2010.
8.)
A
renewal
(Id. ¶ 9.)
In
reliance on the application, Plaintiffs issued a policy with
$1.56 million in coverage for the Property plus $156,000 for
other
structures.
(Id.
¶¶
10-11.)
Thereafter,
Bradley
presented a claim for damages from a flood-related loss that
allegedly occurred on the Property on January 9, 2011.
¶ 12.)
(Id.
At a 2011 examination under oath, Bradley testified that
the Property had remained vacant from the time of purchase until
the date of the loss.
(Id. ¶¶ 13-14.)
Plaintiffs filed this action on August 23, 2011, naming
Bradley as the sole Defendant.
The current complaint seeks the
following relief: (1) rescission of the policy for concealment
and misrepresentation of material facts and a declaration that
the
policy
is
void
ab
initio
(Count
One);
(2)
declaratory
judgment that Plaintiffs have no duty to indemnify Bradley for
the
loss
because
the
Property
was
not
an
occupied
dwelling
seeks a declaratory judgment regarding the coverage provided by an
insurance policy, the object of the litigation is the policy and the
value of the right to be protected is plaintiff’s potential liability
under that policy.”
M.C. Constr. Corp. v. Gray Co., 17 F. Supp. 2d
541, 545 (W.D. Va. 1998) (quoting St. Paul Reinsurance Co. v.
Greenberg, 134 F.3d 1250, 1252[, 1253] (5th Cir. 1998)).
Thus, the
court is satisfied that it has subject matter jurisdiction under 28
U.S.C. § 1332(a)(3), and the second amended complaint is the operative
pleading.
3
(Count Two); (3) declaratory judgment that Plaintiffs have no
duty to indemnify for the loss because of Bradley’s concealment
and
misrepresentation
of
material
facts
and
related
but
unidentified damages (Count Three); and (4) declaratory judgment
that if Plaintiffs are liable, they are only liable to Bradley
for his one-sixth interest in the Property (Count Four).
Counts
Two through Four are stated alternatively to Count One.
On
November
Plaintiffs
7,
initiated
2011,
this
two-and-one-half
action
but
a
day
months
before
after
Bradley’s
response to the initial complaint was due, Bradley and the five
other
putative
owners
of
the
Property
a
state-court
(See Doc. 4-1.)
lawsuit to recover for their loss.
filed
In addition
to naming the Plaintiffs in this case, the state-court complaint
names
as
defendants
Commonwealth
Underwriters,
Ltd.
(“Commonwealth”) (a Virginia-based insurance company authorized
by Plaintiffs to place and write insurance policies, including
the instant policy) and John E. Gilchrist (“Gilchrist”) (a North
Carolina
independent
procuring
the
insurance
policy).
(Id.
agent
¶¶
2-3,
who
participated
11-13,
58-60.)
in
The
plaintiffs in the state-court lawsuit have alleged the following
claims:
breach
of
the
insurance
contract
against
Lloyd’s;
waiver/ratification by Lloyd’s of Commonwealth’s and Gilchrist’s
actions;
estoppel
Commonwealth’s
and
against
Lloyd’s
Gilchrist’s
actions
4
based
as
(in
part)
on
agents;
unfair
and
deceptive trade practice against Lloyd’s; fraud and bad faith
against Lloyd’s by ignoring information known by alleged agents,
Commonwealth
defendants;
and
Gilchrist;
breach
by
breach
Commonwealth
of
fiduciary
and
duty
Gilchrist
by
of
all
their
agreement to procure insurance; negligence by Commonwealth and
Lloyd’s; unfair and deceptive trade practices by Commonwealth
and Lloyd’s; negligence by Gilchrist, imputed to Commonwealth
and
Lloyd’s;
and
unfair
and
deceptive
trade
Gilchrist, imputed to Commonwealth and Lloyd’s.
practices
by
Central to the
allegations of the state-court plaintiffs is the assertion that
Bradley did not sign the policy application, renewal form, or
other
documents
related
to
the
application,
but
rather
that
Commonwealth and/or Gilchrist signed it for him (and misspelled
his signature on both).
208(b), 218(b).)
all
claims
(See, e.g., Doc. 4-1 ¶¶ 48, 137, 140,
Upon Bradley’s motion, the state court stayed
involving
Bradley
with
respect
to
the
Lloyd’s
defendants (Plaintiffs in this case) on April 11, 2012, but the
action is proceeding as to all other claims and parties.
The day after filing the state-court lawsuit, Bradley filed
the present motion to dismiss for Plaintiffs’ alleged failure
“to join all parties who would be affected by the declaratory
relief” and, alternatively, to stay it in light of his ongoing
state-court action that includes the parties in this case.
Doc. 4; Doc. 4-1.)
(See
After the parties briefed Bradley’s motion,
5
the
court
requested
further
briefing
as
to
how,
if
at
all,
Colorado River Water Conservation District v. United States, 424
U.S. 800 (1976), and Great American Insurance Co. v. Gross, 468
F.3d 199 (4th Cir. 2006), applied to the court’s consideration
of Bradley’s motion to stay this case.
have
complied
briefing.
II.
with
the
request
and
(Doc. 9.)
The parties
provided
supplemental
The motion is now ripe for resolution.
ANALYSIS
A.
Motion to Dismiss
Bradley moves to dismiss this action pursuant to Federal
Rules of
Civil Procedure
12(b)(7)
and
19. 3
(Doc.
4.)
His
briefing in support of this motion is sparse, arguing only that
the naming of “Menno Pennink” 4 (“Pennink”) and
Partners”
insurance
as
“lienholders”
policy
renders
on
the
them
declarations
necessary,
“Vintage Hill
page
and
of
the
presumably
3
Bradley also cites to an excerpt from the North Carolina Uniform
Declaratory Judgment Act providing that when declaratory relief is
sought, “all parties shall be made parties who have or claim any
interest which would be affected by the declaration.”
(Doc. 5 at 5
(quoting N.C. Gen. Stat. § 1-260, which is based on § 11 of the
Uniform Declaratory Judgments Act (1922)).) Of course, this remedial
state law governing declaratory actions in state court has no
application to the federal procedural issue before the court.
See
N.C. Gen. Stat. § 1-264 (North Carolina’s Uniform Declaratory Judgment
Act is remedial, its purpose being to settle and afford relief from
uncertainty and insecurity with respect to rights, status, and other
legal relations). Cf. Aetna Life Ins. Co. v. Haworth, 300 U.S. 227,
240 (1937) (“[T]he operation of the Declaratory Judgment Act is
procedural only.”).
4
The name on the 2009 application for insurance and the insurance
policy is spelled as “Menno Pinnock.” (Doc. 1-1; Doc. 1-3.)
6
indispensable,
Notably,
in
parties
to
Bradley’s
this
action.
state-court
(Doc.
action,
he
5
at
2,
alleges
5.)
that
Pennink is a co-owner of the Property and that Vintage Hill
Partners is the management company through whom the Property
owners
operated. 5
(Doc.
4-1
¶¶
2,
83.)
Their
listing
as
lienholders, Bradley baldly asserts, “should certainly establish
that they will be affected” by the action before the court and
are
therefore
necessary.
(Doc.
5
at
2,
5.)
Bradley
also
asserts that Commonwealth, the insurance broker representing the
Lloyd’s
Plaintiffs,
and
Gilchrist,
the
agent
through
whom
Bradley purchased the policy, are also necessary parties because
he
contends
they
participated
in
the
underwriting
decision.
(Id. at 2-5.)
Plaintiffs contend the policy was issued solely to Bradley,
the only “named insured” on the declarations page, and that none
of
the
other
persons
or
entities
identified
by
Bradley
is
necessary under Rule 19 for adjudication of Plaintiffs’ claim.
Rule 12(b)(7) permits dismissal of an action for failure to
join a party under Rule 19.
inquiry.
Rule 19 sets forth a two-step
Owens-Illinois, Inc. v. Meade, 186 F.3d 435, 440 (4th
Cir. 1999).
First, the court must consider whether a non-party
5
In addition to Pennink, Bradley’s alleged co-owners are Suzanne
Pennink, Matthias Geissler, Erica Geissler, and Angela Bradley. (See
Doc. 4-1 (state court complaint).)
There is no dispute that the
other alleged owners are not listed as insureds on the policy.
7
is “required” (i.e., “necessary”) to the action because of its
relationship to the matter under consideration.
19(a)(1)
(“required”);
(“necessary”).
Owens-Illinois,
Fed. R. Civ. P.
186
F.3d
at
440
A party is “required” if, without it, (1) the
court cannot accord complete relief among the existing parties,
or (2) the party (A) is so situated that disposing of the action
in its absence may, as a practical matter, impair or impede its
ability to protect its interest or (B) leave an existing party
subject to substantial risk of incurring double, multiple, or
otherwise inconsistent obligations.
Fed. R. Civ. P. 19(a)(1).
If a person has not been joined as required, the court must
order
that
19(a)(2).
the
person
be
made
a
party.
Fed.
R.
Civ.
P.
If the person is not a “required party,” however, the
inquiry ends.
Second, if a required non-party cannot be joined
because, for example, its presence would destroy the court’s
diversity
jurisdiction,
the
court
must
determine
whether
in
equity and good conscience the proceeding should continue in its
absence or whether the non-party is “indispensable” under Rule
19(b).
advisory
Owens-Illinois, 186 F.3d at 440; see Fed. R. Civ. P. 19,
committee
“indispensable”
because
notes
the
(2007
term
was
amendment)
used
only
(discarding
to
express
a
conclusion reached in applying the tests of Rule 19(b) and thus
was “redundant”).
“Courts are loath to dismiss cases based on
nonjoinder of a party, so dismissal will be ordered only when
8
the
resulting
defect
cannot
be
remedied
inefficiency will certainly result.”
at 441.
and
prejudice
or
Owens-Illinois, 186 F.3d
The court’s decision must be made pragmatically, in the
context of the substance of each case rather than by procedural
formula.
The court must consider the “practical potential for
prejudice,” including prejudice to those not before the court.
Id.
Bradley,
demonstrating
as
the
moving
entitlement
party,
to
bears
dismissal
the
under
burden
Rule
of
19.
Ultimately, he must “show that the person who was not joined is
needed for a just adjudication.”
Am. Gen. Life & Accident Ins.
Co. v. Wood, 429 F.3d 83, 92 (4th Cir. 2005) (quoting 7 Charles
Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice
and Procedure § 1609 (3d ed. 2001)).
Unfortunately, Bradley has
not developed his arguments beyond mere conclusory statements in
his brief.
The
court
is
persuaded
that
“Vintage
Hill
Partners,”
although appearing on the insurance policy declarations page as
a “lienholder,” is not a required party under the circumstances
of this case.
While Bradley’s state-court complaint alleges
that Vintage Hill Partners was the name under which he and his
co-owners “handled their investment in the [Property],” (Doc. 41 ¶ 83), it is telling that Bradley has not included Vintage
Hill Partners as a plaintiff in his state-court action.
9
(See
id. ¶¶ 2-3.)
Either Vintage Hills Partners does not exist as a
legal
(in
entity
which
case
it
cannot
be
added
as
a
party
anyway) or, if it does, Bradley’s failure to regard it as a
required
party
in
his
state-court
action
makes
it
hard
to
listing
of
conclude how it should be considered one here.
Bradley
Pennink
as
has
a
also
not
“lienholder”
demonstrated
on
the
how
policy’s
should render his presence required.
the
declarations
page
In actuality and contrary
to the representation on the declarations page, Bradley argues
that
Pennink
is
a
co-owner
of
the
Property,
which
Bradley’s allegations in his state-court complaint.
tracks
(See id.
¶¶ 2-3, 77 (listing Pennink’s interests solely as a co-owner,
not as both an owner and lienholder).)
Indeed, Bradley’s state-
court complaint refers to only one lienholder, New Century Bank
South, which holds or held a deed of trust on the Property.
(Id. ¶
69,
Ex.
F.)
Thus,
it
is
difficult
to
conclude
how
Pennink’s listing as a lienholder – which Bradley confesses is
incorrect - would make Pennink a required party for that reason.
Bradley
also
fails
to
demonstrate
Gilchrist are required parties.
agents
of
Plaintiffs.
(Doc.
that
Commonwealth
and
Bradley argues that both were
5
at
2-3.)
At
the
hearing,
Plaintiffs’ counsel acknowledged that Commonwealth acted as its
agent, and Plaintiffs’ current complaint alleges as much.
(Doc.
16 ¶ 1 (alleging that Lloyd’s authorized Commonwealth to write
10
policies
for
it
in
the
United
States).)
While
it
remains
unclear on whose behalf Gilchrist acted (Bradley contends that
“Commonwealth worked with Gilchrist to examine and provide facts
about the risk” and that they had “teamed up before to insure
the house” (Doc. 5 at 2)), 6 it does not matter.
Even if he acted
as an agent of Lloyd’s (Bradley’s strongest argument for making
him a required party), Gilchrist’s presence or absence would not
be necessary for a determination of the liability of the Lloyd’s
Plaintiffs
to
the
insured
under
the
policy.
See
generally
Evanston Ins. Co. v. G & T Fabricators, Inc., 263 F.R.D. 309,
311 (E.D.N.C. 2009) (“[G]enerally, an insurance agent is neither
a necessary nor an indispensable party to either a rescission or
coverage action.”).
Bradley
has
also
not
shown
how
the
failure
to
include
Commonwealth or Gilchrist in this action will impair or impede
their ability to protect their interests.
Certainly, a party
may call Gilchrist or employees of Commonwealth to testify as
witnesses, but any judgment without either one will not bind
them for their own potential liability.
that
either
Plaintiffs
or
Bradley
6
would
There is also no risk
be
left
subject
to
Legally, there is support for the proposition that Gilchrist may
have been acting for Bradley. See Williams v. Canal Ins. Co., 21 N.C.
App. 658, 661-62, 205 S.E.2d, 331, 333-34 (1974) (noting that “[a]n
insurance broker, like other brokers, is primarily the agent of the
person who first employs him, and, in the absence of a statute to the
contrary, he is the agent of insured as to all matters within the
scope of his employment” (quoting 44 C.J.S. Insurance § 140 (currently
§ 262))).
11
double, multiple, or otherwise inconsistent obligations if the
non-parties
are
not
added.
The
action,
as
presently
constituted, will decide only the obligation of Plaintiffs to
provide coverage under the policy.
The
more
difficult
issue,
however,
is
other alleged co-owners are required parties.
advance
this
underlying
argument
controversy
other
is
than
very
by
whether
five
Bradley does not
noting
complicated,
the
that
“[t]he
it
affects
and
numerous individuals and entities who are not joined as parties
to this action.
parties.”
Five record owners of the house are not named
(Doc. 5 at 1.)
Of course, Plaintiffs argue that only
Bradley, as the named insured, is required.
But they, too,
provide no legal guidance.
The court’s independent research reveals one decision where
the court found a husband and wife, who were co-owners of real
property (as tenants in the entireties), required parties to an
action
over
insurance
proceeds
for
the
property
because
a
resolution by the wife’s lawsuit could as a practical matter
impair the husband’s interest in recovery.
Liggon-Redding v.
Am. Sec. Ins. Co., No. 3:06cv227, 2009 WL 3101068 (M.D. Pa.
Sept. 23, 2009).
the
Here, Bradley has not specified the nature of
co-ownership
of
the
absent
five
persons,
making
the
necessity determination muddier.
Moreover, the record presently
reflects
action
that
the
state-court
12
is
founded
only
on
allegations that Bradley may have sought to obtain insurance
coverage for the Property as a representative of the co-owners.
Indeed,
Bradley
alleges
that
someone
forged
his
name
on
the
policy application, and not that the co-owners intended to be
named as insureds under the policy.
Therefore, there is some
basis to believe that any risk of impairment of the co-owners’
interest
by
presence.
their
absence
may
be
minimized
by
Bradley’s
Under this scenario, the claimed interest of any co-
owner may be dependent upon, and fully represented by, that of
Bradley, the named Defendant.
In appropriate cases, joinder is
not compelled where an existing party is capable of serving as a
proxy for an absent party when the interests of the two are
identical.
504-05
(4th
See Ohio Valley Envtl. Coal. v. Bulen, 429 F.3d 493,
Cir.
2005)
(finding
no
abuse
of
discretion
in
district court’s refusal to join non-parties).
In light of the parties’ incomplete analyses, the court
cannot say that Bradley has demonstrated that a non-party must
be joined under Rule 19(a)(1).
further
in
the
analysis,
There is therefore no need to go
and
Bradley’s
motion
to
dismiss
pursuant to Rule 12(b)(7) will be denied at this time. 7
7
Even if Bradley could demonstrate that the co-owners are required
parties, the record reflects that all are North Carolina citizens.
Therefore, their presence would not destroy the court’s diversity
jurisdiction, and dismissal would not be warranted unless Plaintiffs
refused to add them to the action.
13
B.
Discretionary Stay
Bradley moves in the alternative under 28 U.S.C. § 2201 and
Rule 19 to stay this action pending the outcome of the statecourt
lawsuit
regarding
which
he
insurance
contends
coverage
for
will
the
resolve
all
Property.
claims
(Doc.
4.)
Bradley argues that Plaintiffs have omitted key parties who have
a
stake
in
this
litigation
–
the
Property
co-owners,
Commonwealth, and Gilchrist – whose rights and liability should
be determined in one action.
the
action
provide
in
“the
favor
best,
of
He requests that this court stay
the
fairest,
ongoing
cleanest,
state-court
most
lawsuit
efficient,
to
least
complicated, and most binding way for the parties to resolve all
issues.”
(Doc. 13 at 13.)
Plaintiffs contend that the only
issue they have raised is whether they owe Bradley, the sole
named insured on their policy, any duty of indemnity.
Initially, each party addressed Bradley’s motion under the
Declaratory Judgment Act, 28 U.S.C. § 2201.
Section 2201(a)
provides that “any court of the United States, upon the filing
of an appropriate pleading, may declare the rights and other
legal
relations
declaration,
sought.”
of
whether
any
or
not
interested
further
42 U.S.C. § 2201(a).
party
relief
seeking
is
or
such
could
be
The Act “confer[s] on federal
courts unique and substantial discretion in deciding whether to
14
declare the rights of litigants.”
Wilton v. Seven Falls Co.,
515 U.S. 277, 286 (1995).
The
Supreme
Court
has
“repeatedly
characterized
the
Declaratory Judgment Act as ‘an enabling Act, which confers a
discretion on the courts rather than an absolute right upon the
litigant.’”
“[i]n
that
the
Id. at 287 (citations omitted).
declaratory
federal
courts
judgment
should
context,
adjudicate
the
As a consequence,
normal
claims
principle
within
their
jurisdiction yields to considerations of practicality and wise
judicial administration.”
Id. at 288.
The court’s discretion
“is especially crucial” when a parallel or related proceeding is
pending in state court.
New Wellington Fin. Corp. v. Flagship
Resort Dev. Corp., 416 F.3d 290, 297 (4th Cir. 2005).
In such
cases, district courts have “rather wide discretion” to decline
jurisdiction.
Centennial Life Ins. Co. v. Poston, 88 F.3d 255,
257 (4th Cir. 1996).
In perceiving the issue as one falling solely under section
2201,
the
parties
initially
argued
the
applicability
of
the
factors of the balancing test set forth originally in Brillhart
v.
Excess
Ins.
Co.,
316
U.S.
“Brillhart/Wilton” standard).
491
(1942),
(Docs. 6, 7.)
and
Wilton
(the
Those factors, as
articulated by the Fourth Circuit in United Capitol Insurance
Co. v. Kapiloff, 155 F.3d 488 (4th Cir. 1998), are as follows:
15
(1) whether the state has a strong interest in having
the issues decided in its courts; (2) whether the
state courts could resolve the issues more efficiently
than the federal courts; (3) whether the presence of
“overlapping issues of fact or law” might create
unnecessary “entanglement” between the state and
federal courts; and (4) whether the federal action is
mere “procedural fencing,” in the sense that the
action is merely the product of forum-shopping.
155 F.3d at 493-94. 8
Each
party,
however,
failed
to
account
for
Plaintiffs’
rescission claim, which facially is not a declaratory judgment
claim, in the analysis.
Abstention considerations with respect
to nondeclaratory claims are usually undertaken pursuant to the
“exceptional circumstances” test, a more demanding standard for
abstention,
District
v.
set
out
United
in
Colorado
States,
“Colorado River” standard).
424
River
U.S.
Water
800,
817
Conservation
(1976)
(the
That standard, as will be explained
shortly, reflects the “virtually unflagging obligation of the
federal courts to exercise the jurisdiction given them.”
Id.
When confronted with nondeclaratory claims (including those
for rescission) as well as declaratory ones - known as a “mixed”
complaint - courts have taken different approaches with respect
to
whether
(1)
Brillhart/Wilton
applies
to
all
claims,
(2)
Brillhart/Wilton applies only to the declaratory claims, with
the stricter Colorado River standard applying to nondeclaratory
8
Fourth Circuit decisions also cite, as did the court in Kapiloff and
in Great American, to Nautilus Insurance Co. v. Winchester Homes,
Inc., 15 F.3d 371, 376 (4th Cir. 1994), for the standard.
16
ones, or (3) Colorado River applies to all claims.
The Fourth
Circuit acknowledged the problem in Great American, 468 F.3d at
210-11.
There, an insurance company brought an action for (1)
declaratory
insurance
relief
policy
that
the
barred
fraud
coverage
exclusion
for
all
provision
losses,
of
an
including
defense costs, (2) rescission of the policy based on alleged
fraudulent and material misrepresentations made in conjunction
with its procurement, and (3) a demand for refund of certain
litigation costs already advanced pursuant to the policy.
at 204.
Id.
The Fourth Circuit concluded that its jurisprudence
“suggests
that,
Brillhart/Wilton
in
a
‘mixed’
standard
nondeclaratory claims.”
does
not
complaint
apply,
scenario,
at
least
to
the
the
Id. at 211 (citing Chase Brexton Health
Servs. v. Md., 411 F.3d 457, 466-67 (4th Cir. 2005) (stating
that
the
declaratory
Brillhart/Wilton
judgment
standard
claim
is
does
joined
not
with
a
apply
when
nondeclaratory
claim, such as a claim for damages or injunctive relief)).
court declined
to
“express
a
definitive
view”
a
on
the
The
proper
standard in a so-called “mixed case,” however, because it found
that abstention was not warranted under even the “more relaxed”
Brillhart/Wilton standard.
Id.
Complicating the analysis here is the fact that Plaintiffs’
current complaint contains a declaratory claim that includes a
request for money damages, albeit vague.
17
(Doc. 16 ¶ 25 (seeking
“such
other
trial.”).)
that
the
financial
damages
.
.
.
as
may
be
proven
at
Further complicating the consideration is the fact
nondeclaratory
claim
(rescission)
appears
to
be
a
mirror image of the request for declaratory relief – seeking
invalidation of the insurance contract – and will turn on the
same facts.
These are potentially relevant because four years
after
American,
Great
opinion,
stated
the
that
Fourth
“[a]
Circuit,
in
perfunctory
an
unpublished
inclusion
of
nondeclaratory requests for relief does not suffice to remove a
plaintiff
from
declaratory
the
ambit
judgment
of
the
plaintiff
Brillhart/Wilton
may
not
convert
rule.
a
A
district
court’s discretionary jurisdiction under Brillhart/Wilton into
nearly mandatory jurisdiction under Colorado River [], simply by
tossing
in
dependent
or
boilerplate
nondeclaratory
requests.”
Riley v. Dozier Internet Law, PC, 371 F. App’x 399, 404 n.2
(2010)
however,
(unpublished).
when
the
The
additional
Riley
claim
analysis
is
not
declaratory claim but is a wholly independent.
does
not
dependent
apply,
on
the
Educ. Sys. Fed.
Credit Union v. Cumis Ins. Soc., Inc., Civ. Action No. DKC 093217, 2010 WL 1930582, at *3 (D. Md. May 12, 2010) (addressing
additional claim for breach of contract).
In
assessing
Plaintiffs’
complaint,
the
court
concludes
that the separate rescission claim, while seeking an outcome
(namely, no duty to indemnify) nearly identical to two of the
18
three declaratory claims (Counts Two and Three), does not depend
on the relief sought in them.
Thus, the Riley consideration
does not appear to apply, and the court will apply the Colorado
River
standard
whether
to
Colorado
that
River
claim.
or
The
court
need
Brillhart/Wilton
not
resolve
applies
to
the
declaratory claims, however, because, for the reasons set forth
below, the court finds that abstention is warranted under both
tests.
1.
Rescission Claim
A predicate to applying the Colorado River factors is the
existence of a parallel state court proceeding.
Gannett Co. v.
Clark Constr. Grp., Inc., 286 F.3d 737, 741 (4th Cir. 2002).
A
parallel proceeding exists “if substantially the same parties
litigate
substantially
the
same
issues
in
different
forums.”
Id. at 742 (quoting New Beckley Mining Corp. v. Int’l Union, 946
F.2d
1072,
1073
(4th
Cir.
1991)).
Thus,
the
threshold
requirement consists of two prongs: (1) substantially the same
parties;
and
(2)
substantially
the
same
issues.
Only
after
meeting this requirement is Colorado River implicated.
In
the
present
court,
there
are
Lloyd’s (and their names) and Bradley.
court
action
includes
includes
Gilchrist,
Property
owners.
these
same
Commonwealth,
On
its
face,
19
three
these
the
two
The underlying state-
parties;
and
parties:
the
may
additionally,
five
not
other
appear
it
alleged
to
be
“substantially the same parties” required by New Beckley Mining,
946 F.2d at 1073.
However, the “substantially same parties”
requirement appears to be intended to address situations where
there are more parties in federal court than in state court.
See Chase Brexton, 411 F.3d at 464 (involving seven plaintiffs
in the federal court proceeding, only two of whom were involved
in the state court proceeding; abstention would deprive five of
the
parties
of
their
opportunity
to
litigate);
cf.
Great
American, 468 F.3d at 208 (noting plaintiff in Colorado River
was a party to the state-court action, unlike case before the
court).
The reason for this is plain: a federal court that
abstains
when
the
parallel
state
court
proceeding
parties will leave some of its parties in limbo.
the case here.
actions
fewer
That is not
All parties in the present case are in the
state-court action.
the
has
are
Thus, for purposes of determining whether
parallel,
the
inclusion
of
the
additional
parties in the state case is insufficient to render the parties
not “substantially” the same.
The second prong of the threshold question is whether the
parties are litigating substantially the same issues.
Much like
the first prong, there are more issues in the underlying statecourt action than in this case.
This is not surprising given
the inclusion of more parties and the narrow focus of the action
before this court.
However, the issues to be litigated in this
20
court are substantially the same as those in the state-court
action:
the validity of the contract; whether it was procured
by fraud; and whether Plaintiffs are liable for all or part of
the loss. 9
Yet Plaintiffs argue that the cases are not parallel
because the state court has stayed Bradley’s claims.
8-1.)
(See Doc.
The stay is insufficient to invalidate the same issues
requirement.
The state court stay is predicated only on the
pendency of the present federal claim against Bradley.
If this
court abstains, the state court may proceed on all claims. 10
Accordingly, the threshold requirement has been met, and
the Colorado River analysis is necessary.
“[T]he decision whether to dismiss a federal action because
of parallel state-court litigation does not rest on a mechanical
checklist, but on a careful balancing of the important factors
as they apply in a given case, with the balance heavily weighted
in favor of the exercise of jurisdiction.”
Moses H. Cone Mem’l
9
The substantially same nature of the state-court claims by the
Lloyd’s insurers and their claims in this court is illustrated by the
“Answer and Defenses” they filed in state court prior to the stay of
Bradley’s claims.
The Lloyd’s insurers’ Seventh and Eighth Defenses
assert that the claims of Bradley and his co-plaintiffs are barred and
the equitable doctrine of rescission applies to the extent facts
material to the risks at issue were concealed, omitted, or
misrepresented.
(See Doc. 13-1 at 19.)
The Nineteenth Defense
asserts that coverage extended only to dwellings as defined in the
policy, and the Twentieth Defense asserts coverage exists, if at all,
only to the extent of Bradley’s one-sixth ownership in the Property.
(Id. at 21.)
These state-court defenses track the rescission and
declaratory relief counts in the second amended complaint.
10
If the state court for any reason does not lift the stay, the
parties would be free to revisit the issue in this court.
21
Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16 (1983).
Colorado
River
standard
is
comprised
of
four
factors
The
from
Colorado River and two additional factors articulated in Moses
H. Cone, as follows:
(1) whether the subject matter of the litigation
involves property where the first court may assume in
rem jurisdiction to the exclusion of others; (2)
whether the federal forum is an inconvenient one; (3)
the desirability of avoiding piecemeal litigation; (4)
the relevant order in which the courts obtained
jurisdiction and the progress achieved in each action;
(5) whether state law or federal law provides the rule
of decision on the merits; and (6) the adequacy of the
state proceeding to protect the parties' rights.
Great Am., 468 F.3d at 207-08.
determinative.
No one factor is necessarily
Colorado River, 424 U.S. at 819.
This court
will make “a carefully considered judgment taking into account
both the obligation to exercise jurisdiction and the combination
of factors counselling [sic] against that exercise.”
818-19.
Id. at
In balancing the Colorado River factors, courts should
undertake “a pragmatic, flexible” approach to “the realities of
the case at hand.”
F.
App’x
(finding
concluding
Colorado
182,
187
district
case
River
E.g., Sto Corp. v. Lancaster Homes, Inc., 11
(4th
Cir.
court
did
presented
factors
2001)
not
(unpublished
abuse
exceptional
slightly
favored
its
per
curiam)
discretion
by
circumstances;
two
abstention
one
and
overwhelmingly favored it); see Massey Energy Co. v. Am. Int’l
Specialty Lines Ins. Co., 2:09-cv-00029, 2009 WL 1034243, at *7-
22
9 (S.D.W. Va. Apr. 16, 2009) (abstaining after raising Colorado
River sua sponte; finding lack of property with respect to the
first factor was not enough to make abstention inappropriate in
light of other factors favoring abstention (citing Sto Corp.)).
Under
Colorado
River,
federal
courts
have
a
“virtually
unflagging obligation . . . to exercise the jurisdiction given
them.”
424 U.S. at 817.
“Despite what may appear to result in
a duplication of judicial resources, the rule is well recognized
that the pendency of an action in the state court is no bar to
proceedings
concerning
having jurisdiction.”
the
same
matter
in
the
Federal
court
McLaughlin v. United Va. Bank, 955 F.2d
930, 934 (4th Cir. 1992) (quoting McClellan v. Carland, 217 U.S.
268, 282 (1910)) (internal citation marks omitted).
However,
situations arise that require the issue to be litigated in state
court.
In deciding whether to abstain from hearing a properly
brought case in federal court, the court must remember that this
principle of abstention “rest[s] on considerations of ‘(w)ise
judicial
judicial
administration,
resources
litigation.’”
giving
and
regard
to
comprehensive
conservation
of
disposition
of
Colorado River, 424 U.S. at 817 (quoting Kerotest
Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 183 (1952)).
The
property
first
subject
factor
to
exclusion of others.
the
is
whether
court’s
in
the
litigation
rem
jurisdiction
This is not the case.
23
involves
to
the
This is a contract
claim, and neither this court nor the state court has assumed
jurisdiction over the Property.
The
second
inconvenient.
factor
The
is
whether
state-court
the
action
which lies in this federal district.
is
federal
pending
forum
in
is
Durham,
While a trial in Durham’s
federal courthouse would provide a nearly identical location,
even
a
trial
in
Winston-Salem,
the
home
of
the
district’s
farthest courthouse, would be only marginally more inconvenient.
Cf. Colorado River, 424 U.S. at 805 (federal courthouse was 300
miles away from the location in question).
The third factor is the desirability of avoiding piecemeal
litigation.
“Piecemeal
litigation
occurs
when
different
tribunals consider the same issue, thereby duplicating efforts
and possibly reaching different results."
Gannett Co., 286 F.3d
at 744 (quoting Am. Int'l Underwriters, Inc. v. Cont’l Ins. Co.,
843 F.2d 1253, 1258 (9th Cir. 1988)).
For abstention to be
appropriate, however, “retention of jurisdiction must create the
possibility
of
inefficiencies
and
inconsistent
results
beyond
those inherent in parallel litigation, or the litigation must be
particularly illsuited for resolution in duplicate forums.”
at
744;
potential
see
for
Chase
Brexton,
conflict
of
411
results
warrant a stay).
24
F.3d
does
at
465
not,
(noting
“without
Id.
mere
more,”
Plaintiffs
contend
there
is
no
threat
of
piecemeal
litigation because (1) Bradley’s claims are stayed, (2) this
court’s determination on Bradley’s claims would bind all parties
in
the
state-court
action,
(3)
if
the
insurance
policy
is
declared void, the state-court tort claims would fall by the
wayside,
and
(necessary)
demonstrates
(4)
if
persons
that
the
are
the
court
already
court
finds
party
can
that
to
resolve
all
this
required
action,
Plaintiffs’
it
claims
without impairing any person’s ability to protect his or its
interest.
But these are unpersuasive responses.
Most importantly,
only Bradley’s claims against Lloyd’s are stayed in the statecourt action.
His claims against Commonwealth and Gilchrist and
the claims of the five other Property co-owners in the statecourt action are proceeding apace.
Even if Bradley’s claims
remained stayed (which is unlikely), identical issues as to the
validity of, and coverage under, the policy are likely to arise
because the co-owners assert, among other things, a right to
policy coverage through Bradley’s application on their behalf.
Moreover, in the state-court action the Lloyd’s insurers assert
an
affirmative
defense
that
all
claims
under
the
policy
are
barred and the equitable doctrine of rescission applies “[t]o
the extent Plaintiffs [Bradley and the co-owner plaintiffs in
that action] . . . intentionally or unintentionally failed to
25
disclose or concealed, omitted, or misrepresented facts material
to the risks at issue” in that litigation.
This
is
precisely
concurrent
and
the
issue
overlapping
here.
(Doc. 13-1 at 19.)
Thus,
litigation
as
to
there
the
would
be
fundamental
issue at stake in the federal case.
Further, if the court proceeds in this case, it is a near
certainty that Bradley will assert, as he did (and as the coowners are doing) in state court, that the Lloyd’s insurers are
bound by the actions and/or omissions of Commonwealth, their
acknowledged
agent,
and
Gilchrist
–
precise
issues
being
litigated in the state-court action even under the current stay.
Indeed, during the hearing on the present motion, Plaintiffs’
counsel
stated
that
if
the
federal
action
is
permitted
to
proceed, he anticipated filing a motion to stay all the statecourt
proceedings,
entanglement. 11
which
is
tantamount
to
an
admission
of
If the state court were to enter such a stay,
the result would certainly be piecemeal litigation.
And if the
court were to decline to stay its proceedings, it is likely that
both courts would consider the same or intertwined issues.
is not a case of dissimilar disputes.
This
Cf. Am. Bankers Ins. Co.
of Fla. v. First State Ins. Co., 891 F.2d 882, 885 (11th Cir.
11
Although
“entanglement”
is
listed
as
a
factor
under
Brillhart/Wilton applicable to requests for declaratory judgment, the
entanglement here will likely lead to piecemeal litigation, a factor
under Colorado River.
See Colorado River, 424 U.S. at 818 (citing
Brillhart for the third factor, “the desirability of avoiding
piecemeal litigation”).
26
1990)
(finding
that
because
“the
underlying
disputes
are
different,” the occurrence of “some piecemeal litigation” was
insufficient to warrant abstention).
being
asked
to
resolve
the
same
Rather, both courts are
dispute
with
respect
to
insurance coverage under the policy, and in doing so will rely
on
the
same
parallel
evidence
proceedings
and
legal
theories.
progressing
The
piecemeal
specter
is
of
manifest.
Consequently, this factor weighs heavily in favor of Bradley.
The fourth factor is who obtained jurisdiction first and
the relative progress in each case.
they
obtained
question
the
Plaintiffs
jurisdiction
propriety
did
so
of
almost
first.
their
Plaintiffs are correct that
While
having
immediately
the
filed
after
court
in
does
this
denying
not
court,
Bradley’s
claim, giving Bradley little opportunity to file first. 12
The
Supreme Court cautions, moreover, that “priority should not be
measured exclusively by which complaint was filed first, but
rather in terms of how much progress has been made in the two
actions.”
Moses H. Cone, 460 U.S. at 21.
of the state case favors Bradley.
The relative progress
Lloyd’s indicated at the
hearing that they have already filed motions for dismissal in
the state-court action, and the case had a mediation date set
for next month and tentative trial date the following month.
12
Plaintiffs were of course aware at that time that there were five
other alleged owners of the Property and, therefore, that litigation
by those owners as well as Bradley was likely. (See Doc. 4-1, Ex. C
(August 15, 2011 letter of Plaintiffs’ counsel).)
27
(See
Doc.
13-3.)
Additionally,
there
has
been
progress
on
discovery, although it is only at the written discovery stage
(the state-court plaintiffs served discovery with the complaint
and the Lloyd’s insurers responded and produced a large volume
of
documents).
(Doc.
13
at
2-4.)
Further,
Gilchrist,
a
defendant in the state-court action, recently filed an answer.
(See Doc. 15.)
Here, the court has only today satisfied itself
that the second amended complaint sets forth sufficient facts
for its subject matter jurisdiction, Bradley has not filed an
answer, and the parties have yet to engage in any discovery.
On
balance, this factor favors Bradley because of the advancement
of the state-court action and the apparent jockeying for a quick
filing by the parties.
The fifth factor is whose law controls.
question of state, not federal, law.
This case involves
Bradley contends that this
factor weighs in his favor, citing Mitcheson v. Harris, 955 F.2d
235 (4th Cir. 1992), for the proposition that states have a
strong
interest
(addressing
in
interpreting
dismissal
of
their
declaratory
own
law.
action).
Id.
at
237
However,
the
present case deals with settled principles of state contract,
insurance,
and
agency
law
and
does
not
present
“difficult
questions of state law bearing on policy problems of substantial
public import whose importance transcends the result in the case
28
at bar.”
Colorado River, 424 U.S. at 814.
If this factor
favors Bradley, it does so only marginally.
The sixth factor is the adequacy of the state proceeding to
protect the parties’ rights.
Plaintiffs make no claim to this
factor
that
aside
from
suggesting
it
is
unclear
whether
the
North Carolina state court can adequately protect their rights.
(Doc. 11 at 7.)
This argument is sheer speculation.
The North
Carolina state court is fully capable of protecting the rights
of all parties.
This factor weighs in favor of Bradley.
Having carefully considered these factors and recognizing
that this court has a “virtually unflagging responsibility” to
exercise
jurisdiction
nevertheless
concludes
in
cases
that
brought
this
case
before
it,
presents
the
the
court
type
“exceptional circumstance” envisioned by Colorado River.
of
The
state and federal actions raise virtually identical claims and
legal theories, and piecemeal litigation and entanglement are
likely
to
occur
if
this
case
were
permitted
to
proceed.
Consequently, the rescission claim should be stayed.
2.
Declaratory Claims
As noted, there is a question in the Fourth Circuit as to
the standard to be applied to declaratory claims in the “mixed”
complaint scenario.
The court need not determine which standard
applies here because a stay is warranted under either standard.
If the Colorado River standard applies, the declaratory claims
29
should be stayed for the same reasons as the closely-related
nondeclaratory claims.
If the “more relaxed” Brillhart/Wilton
standard
applies,
court
analysis.
The
important
state
the
federal
law
need
lawsuit
issues,
and
not
does
the
engage
not
in
raise
state
a
lengthy
difficult
court
is
or
better
positioned to resolve the claims and issues more efficiently in
that all parties are present before it. In addition, there is
some indication that the federal action, which was filed quickly
after denying coverage and only seeks to ward off an inevitable
state-court action for damages under the insurance policy, was a
calculated filing.
Most importantly, however, is the fact that
the federal action will result in inevitable entanglement with
state-court determinations of identical claims and issues, for
the
reasons
noted
above.
Accordingly,
abstention
over
the
declaratory claims is appropriate.
III. CONCLUSION
To
be
sure,
litigation
should
not
be
stayed
when
a
defendant brings an action in state court solely in the hopes of
avoiding a federal court determination on the merits.
Here,
however, Bradley presents a compelling case that a stay of the
federal action is appropriate.
IT IS THEREFORE ORDERED that:
1.
Bradley’s motion to dismiss pursuant to Rules 12(b)(7)
and 19 (Doc. 4) is DENIED.
30
2.
to
Second
Bradley’s Motion to Stay, as renewed by his Objection
Amended
Complaint
and
Motion
to
Stay
Proceedings
Pursuant to Federal Rules 12(b)(7) and 19 (Docs. 4, 17), is
GRANTED, and this action shall be STAYED pending further order
of the court.
3.
Bradley’s Objection to Amended Complaint and Motion to
Stay Proceedings Pursuant to Federal Rules 12(b)(7) and 19 (Doc.
12) is DENIED AS MOOT.
4.
Bradley’s motion to stay the time to file answer (Doc.
17) is GRANTED and shall extend until twenty (20) days after the
lifting of the stay imposed by this Order.
5
The parties are directed to file joint, written status
reports concerning the progress of the state-court case every
two months, beginning October 1, 2012.
/s/
Thomas D. Schroeder
United States District Judge
August 8, 2012
31
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