Ohio Farmers Insurance Company v. Graham Construction Services, Inc et al

Filing 69

ORDER by Judge Daniel L. Hovland DENYING Graham Construction's motions to dismiss or transfer 16 59 61 , but the Court abstains from exercising jurisdiction over the action and STAYS the federal court proceedings until the parellel state court proceedings in Minnesota are resolved. (QF)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
NORTHWESTERN DIVISION
Ohio Farmers Insurance Company,

)
)
Plaintiff and
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Counter-Defendant,
)
)
)
)
vs.
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ORDER DENYING GRAHAM
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CONSTRUCTION SERVICES’
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MOTION TO DISMISS AND STAYING
Graham Construction Services, Inc.
)
ALL FURTHER FEDERAL COURT
)
PROCEEDINGS
Defendant and
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Cross-Defendant,
)
)
Case No. 4:11-cv-081
vs.
)
)
Adventure Divers, Inc.
)
)
Defendant,
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Cross-Claimant, and
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Counter-Claimant.
)
_________________________________________________________________________________
Before the Court is Graham Construction Services, Inc.’s (“Graham Construction”) “Motion
to Dismiss Complaint of Ohio Farmers Insurance Company and Cross Claim of Adventure Divers,
Inc.” filed on November 15, 2011. See Docket No. 16. For the reasons set forth below, the Court
denies Graham Construction’s motion, abstains from exercising jurisdiction in this dispute under the
Federal Declaration Judgment Act, and stays all further proceedings in federal court until a final
resolution of the parallel state court proceedings in Minnesota has occurred.

I.

BACKGROUND
Graham Construction Services, Inc. is a construction company with its principal place of

business in Eagan, Minnesota. See Docket No. 1, p. 1. Ohio Farmers Insurance Company is a
commercial surety company with its principal place of business in Westfield, Ohio. Adventure Divers,

Inc. (“ADI”) is a North Dakota corporation engaged in the business of underwater contracting, with
its principal place of business in Minot, North Dakota.
On or about November 7, 2008, Graham Construction entered into a contract with the Standing
Rock Sioux Tribe for the construction of a fresh water intake structure known as the Indian Memorial
Intake Phase 1, in Mobridge, South Dakota. Graham Construction entered into a subcontract with ADI
in which ADI agreed to perform underwater work on the Mobridge project. The contract between
Graham Construction and ADI contains the following choice of law and forum selection clauses:
This Subcontract shall be governed by the laws of the State in which contractor is
incorporated. Contractor shall have the exclusive and unilateral right, at its option, to
require that the venue for any legal action under this Subcontract be in the State of its
incorporation Superior Court of its choosing, or in the county that the Project is
located, and Subcontractor expressly agrees to Contractor’s exercise of such option.
See Docket Nos. 18-1 and 18-2.
The contract between Graham Construction and ADI requires ADI to obtain and deliver a
performance bond which named Graham Construction as the obligee. ADI obtained a performance
bond from Ohio Farmers Insurance. The bond contains a choice of law and forum selection clause
which provides that “[a]ny proceeding, legal or equitable, under this bond may be instituted in any
court of competent jurisdiction in the location in which the work or part of this work is located . . . .”
See Docket No. 18-4. Thus, the contract provides that Minnesota law governs the contracts and grants
Graham Construction the exclusive right to select the forum for any litigation under the contracts.
On or about October 1, 2009, Graham Construction entered into a contract to construct a fresh
water intake structure for the City of Parshall, North Dakota. On or about December 2, 2009, Graham
Construction entered into a subcontract agreement with ADI. See Docket No. 18-3. An identical
choice of law and forum selection clause as appears in the Mobridge contract also appears in the
Parshall contract. See Docket No. 18-3. ADI was required in the Parshall contract to obtain and
deliver a performance bond which named Graham Construction as the obligee. ADI again obtained
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a performance bond from Ohio Farmers Insurance. See Docket No. 18-5. The bond contains an
identical forum selection clause as the Mobridge project bond agreement. See Docket No. 18-5.
Problems arose during the work conducted at both the Mobridge and Parshall projects which
gave rise to this action. This dispute arises out of the two contracts entered into between Graham
Construction and ADI.
The record reveals that Ohio Farmers Insurance claims that ADI was required to dredge 50square feet of a lake bed and attach a water intake screen in the Mobridge contract. See Docket No.
1, p. 3. ADI discovered that, unlike the conditions described in the project plan which claimed the
lake bed was primarily silt and loose mud, the lake bed was composed of hard clay. ADI notified
Graham Construction of the unexpected conditions and sought to review alternative plans with
Graham Construction and the Standing Rock Sioux Tribe, the owners of the Mobridge project. The
parties did not reach an agreeable resolution. ADI completed the work nonetheless. Ohio Farmers
Insurance contends that Graham Construction owes ADI at least $662,306.90 for work completed on
the Mobridge project. As to the Parshall project, Ohio Farmers Insurance contends that ADI was
obligated to assist with the drilling of two pipe lines, supply and install an intake screen structure, and
supply and install a waste outlet structure. See Docket No. 1, p. 5. Graham Construction allegedly
delayed ADI’s access to the project site from the summer of 2010 to the winter of 2010-2011, which
ADI claims was a substantial change considering the additional work and precautions required for
winter underwater diving. Graham Construction allegedly requested that ADI complete work in
addition to the obligations set forth in the contract. Ohio Farmers Insurance alleges that Graham
Construction failed to pay ADI for any work performed on the Parshall project. In addition to the
failure to pay, Ohio Farmers Insurance contends that Graham Construction interfered with ADI’s
performance by failing to coordinate, supervise, or direct the subcontractors working on the Parshall
project.
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Graham Construction contends that ADI failed to timely and properly complete the contracted
work on the Mobridge project. See Docket No. 17, p. 3-4. In late November 2010, ADI notified
Graham Construction and the Standing Rock Sioux Tribe that ADI believed it had completed the
work. However, the work apparently did not meet the contract specifications and ADI’s work failed
inspection. The Standing Rock Sioux Tribe provided an extension of time to complete the project, but
ADI’s work allegedly failed to meet the specifications a second time. Graham Construction
terminated ADI from the Mobridge project and hired a replacement contractor to complete the project.
As to the Parshall project, Graham Construction claims that the contract required ADI to complete its
work by the fall of 2010. See Docket No. 17, p. 5. Graham Construction granted a time extension to
ADI to complete the work by March 31, 2011, “pursuant to a revised schedule.” Graham Construction
terminated ADI from the Parshall project after ADI failed to complete its work by May 2011, and
hired a replacement contractor to complete the project.
On October 11, 2011, Ohio Farmers Insurance filed a declaratory judgment action in federal
court in North Dakota. See Docket No. 1. Ohio Farmers Insurance claims that ADI met its obligations
under the contracts for the Parshall and Mobridge projects, and requests the Court declare that (1) it
owes nothing to Graham Construction under the performance bonds, or (2) in the alternative, that Ohio
Farmer Insurance’s aggregate liability to Graham Construction is limited to the penal sum of the bond
agreements and any amount owed to Graham Construction is subject to a set-off from what Graham
Construction may owe ADI.
On November 9, 2011, ADI filed a “Separate Answer of Adventure Divers, Inc., to Complaint,
Counterclaim Against Ohio Farmers Insurance Company, and Cross Claim Against Graham
Construction, Inc.” See Docket No. 15. ADI’s cross-claim alleges that Graham Construction
breached the contracts.

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On November 14, 2011, Graham Construction filed an action in Minnesota state court against
ADI and Ohio Farmers Insurance. See Docket No. 18-9. Graham Construction alleges that ADI
breached the contracts and Ohio Farmers Insurance breached the performance bond agreements.
On November 15, 2011, Graham Construction filed a “Motion to Dismiss Complaint of Ohio
Farmers Insurance Company and Cross Claims of Adventure Divers, Inc.” See Docket No. 16.
Graham Construction contends that the Court should dismiss the claims against it, abstain from
exercising jurisdiction, or transfer the claims to Minnesota. On December 6, 2011 and January 5,
2012, Ohio Farmers Insurance and ADI filed responses in opposition to the motion. See Docket Nos.
25 and 31. Graham Construction filed reply briefs on December 20, 2011 and February 8, 2012. See
Docket No. 28 and 50. On February 10, 2012, a hearing was held in Bismarck, North Dakota.
On February 23, 2012, Ohio Farmers Insurance filed an amended complaint. See Docket No.
57. Graham Construction renewed its motion requesting that the Court to dismiss, abstain from
exercising jurisdiction, or transfer the claims to Minnesota. See Docket No. 59. On March 26, 2012,
Ohio Farmers Insurance filed response brief in opposition. See Docket No. 67.
On November 21, 2011, Ohio Farmers Insurance removed Graham Construction’s state court
lawsuit in Minnesota to federal district court in Minnesota. See Case No. 11-cv-3414 (D. Minn.). On
December 12, 2011, Graham Construction filed a motion to remand the action back to the Minnesota
state court. On March 27, 2012, Chief Magistrate Judge Arthur J. Boylan issued a Report and
Recommendation, and recommended that the federal district court grant Graham Construction’s
motion to remand. On April 19, 2012, Chief Judge Michael J. Davis adopted the Report and
Recommendation, and granted Graham Construction’s motion to remand the action to the state court
in Minnesota. See Case No. 11-cv-3414 (D. Minn.), Docket No. 58. Thus, the companion case in
Minnesota involving the same parties and the same claims is currently pending and venued in state
district court in Minnesota.
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II.

LEGAL DISCUSSION
Generally, a federal district court must exercise its jurisdiction over a claim unless there are

“exceptional circumstances” for not doing so. Scottsdale Ins. Co. v. Detco Indust, Inc., 426 F.3d 994,
996 (8th Cir. 2005) (citing Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16-19
(1983); Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 818 (1976)). In Wilton
v. Seven Falls Co., the United States Supreme Court held that “although the District Court ha[s]
jurisdiction of the suit under the Federal Declaratory Judgment Act, it [is] under no compulsion to
exercise that jurisdiction.” 515 U.S. 277, 282 (1995) (quoting Brillhart v. Excess Ins. Co. of Am., 316
U.S. 491, 494 (1942)).
In Wilton v. Seven Falls Co., the plaintiffs filed a federal declaratory judgment action and the
defendants filed a parallel state court action concerning the same dispute. The federal district court
dismissed the declaratory judgment action and the Fifth Circuit Court of Appeals upheld the decision.
Id. 515 U.S. at 280-81. The United States Supreme Court held that the Declaratory Judgment Act was
an enabling act which “created an opportunity, rather than a duty, to grant a new form of relief to
qualified litigants.” Id. at 288. The Declaratory Judgment Act states that a federal court “may declare
the rights and other legal relations of any interested party seeking such a declaration . . .” and the
Supreme Court found the Act’s permissive language supported the conclusion that a district court has
broad discretion to exercise jurisdiction or not. Id. at 286 (emphasis in original).
The Supreme Court in Wilton discussed at length Brillhart v. Excess Ins. Co. of Am., 515 U.S.
277 (1943) which provided several non-exclusive factors to consider in determining whether to
exercise jurisdiction over a federal declaratory judgment action when a parallel state court action has
been filed:
[A] district court should examine “the scope of the pending state court proceeding and
the nature of th defenses open there.” . . . . This inquiry, in turn, entails consideration
of “whether the claims of all parties in interest can satisfactorily be adjudicated in that
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proceeding, whether necessary parties have been joined, whether such parties are
amenable to process in that proceeding, etc.” . . . . Other cases, the Court noted, might
shed light on additional factors governing a district court’s decision to stay or to
dismiss a declaratory action at the outset. . . . But Brillhart indicated that, at least
where another suit involving the same parties and presenting opportunity for
ventilation of the same state law issues is pending in state court, a district court might
be indulging in “gratuitous interferences,” . . . if it permitted the federal declaratory
action to proceed.
Wilton, 515 U.S. at 283 (quoting Brillhart, 316 U.S. at 495) (citation omitted).
The Minnesota state court action initiated by Graham Construction involves the same parties
and the same claims as the declaratory judgment action initiated by Ohio Farmers Insurance in North
Dakota. Minnesota state law will apply and the state court proceedings will resolve the dispute. The
Eighth Circuit Court of Appeals has consistently held that a federal district court does not abuse its
discretion by abstaining when a parallel state court action involves the same parties and disputes, state
law applies, and the state court proceedings would resolve the dispute. See Evanston Ins. Co. v. Johns,
530 F.3d 710, 713 (8th Cir. 2008) (“If the pending state court proceeding would better settle the issues,
the district court must dismiss the federal action because it would be uneconomical as well as
vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending
in a state court presenting the same issues, not governed by federal law, between the same parties.”)
(quoting Capitol Indem. Corp. v. Haverfield, 218 F.3d 872, 874-75 (8th Cir. 2000) (internal quotations
and original citation omitted)); Cincinnati Indem. Co. v. A & K Constr. Co., 542 F.3d 623, 624-25 (8th
Cir. 2008); Royal Indem. Co. v. Apex Oil Co., 511 F.3d 788, 793 (8th Cir. 2008).
Ohio Farmers Insurance contends that the Court should exercise its jurisdiction, in part,
because it filed its lawsuit first. The record reveals that Ohio Farmers Insurance filed this federal court
action on October 11, 2011. Graham Construction filed the state court action in Minnesota
approximately a month later on November 14, 2011. The circumstances in this case are similar to

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those in Wilton. In Wilton, an insurance company disputed whether an insurance policy covered an
insured’s liability. See Wilton, 515 U.S. at 279-80. On February 24, 1993, the insurance company
filed a declaratory judgment action in federal district court in Texas. On March 26, 1993, the insured
filed a state court action. Despite the fact the insurance company filed its declaratory judgment action
in federal court before the insured’s state court action, the Supreme Court in Wilton held that the
federal district court did not abuse its discretion when it abstained from exercising jurisdiction.
The Eighth Circuit has held that abstention is appropriate when, as here, a parallel state court
action involves the same parties and disputes, state law applied, and the state court proceedings would
resolve the dispute. Evanston, 530 F.3d at 713; Cincinnati Indem. Co., 542 F.3d at 624-25;
Haverfield, 218 F.3d at 874-75; Royal Indem. Co., 511 F.3d at 793. The Court finds that it is
appropriate to abstain from exercising jurisdiction over this matter. All of the claims of the parties can
be satisfactorily adjudicated in the pending state court proceedings in Minnesota. Further, Minnesota
law will apply based on the choice of law and forum selection clauses contained in the contracts.
Graham Construction has requested a dismissal of Ohio Farmers Insurance’s declaratory
judgment action. However, it is well-established that a stay of the proceedings is generally the more
appropriate course of action. See Royal Indem., 511 F.3d at 797 (“where the basis for declining to
proceed is the pendency of a state proceeding, a stay will often be the preferable course, because it
assures that the federal action can proceed without risk of a time bar if the state case . . . fails to
resolve the matter in controversy.”) (quoting Wilton, 515 U.S. at 288 n.2)); Int’l Ass’n of
Entrepreneurs of Am. v. Angoff, 58 F.3d 1266, 1271 (8th Cir. 1995) (“Here, while the state court
action may finally resolve the case, it is also possible that further federal proceedings may prove
necessary. So long as a possibility remains, a stay rather than dismissal is the preferred mode of

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abstention.”). The Court will abstain from exercising its jurisdiction in this dispute, and will stay the
action in federal court until the parallel proceedings in state court in Minnesota are resolved.

III.

CONCLUSION
The Court has carefully reviewed the record and relevant case law. For the reasons set forth

above, the Court DENIES Graham Construction’s motion (Docket No. 16), abstains from exercising
jurisdiction under the Federal Declaratory Judgment Act, and STAYS all federal court proceedings
until a resolution of the parallel state court proceedings in Minnesota has occurred.
IT IS SO ORDERED.
Dated this 3rd day of May, 2012.
/s/ Daniel L. Hovland
Daniel L. Hovland, District Judge
United States District Court

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