Cincinnati Insurance Company v. Herman Grant Co., Inc.

Filing 31

MEMORANDUM OPINION : For the aforementioned reasons, the Court GRANTS Herman Grants motions to dismiss (Case No. 1:16-cv-369, Doc. 13; Case No. 1:17-cv-116, Doc. 14) and DECLINES to exercise jurisdiction over this declaratory judgm ent action. Accordingly, this action will be DISMISSED WITHOUT PREJUDICE. Accompanying judgments will issue in each case. Signed by District Judge Travis R McDonough on 7/11/2017. Associated Cases: 1:16-cv-00369-TRM-SKL, 1:17-cv-00116-TRM-SKL(DJH, )

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TENNESSEE
AT CHATTANOOGA
CINCINNATI INSURANCE COMPANY,
Plaintiff,
v.
HERMAN GRANT CO., INC.,
Defendant.

COLUMBIA NATIONAL INSURANCE
COMPANY,
Plaintiff,
v.
HERMAN GRANT CO., INC.,
Defendant.

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Case No. 1:16-cv-369
Judge Travis R. McDonough
Magistrate Judge Susan K. Lee

Case No. 1:17-cv-116
Judge Travis R. McDonough
Magistrate Judge Susan K. Lee

MEMORANDUM OPINION

Before the Court are motions to dismiss filed by Defendant Herman Grant Co., Inc., in
each of these consolidated cases. (Case No. 1:16-cv-369, Doc. 13; Case No. 1:17-cv-116, Doc.
14.)1 For the reasons discussed herein, the Court will GRANT the motions to dismiss.

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The Court previously consolidated these cases for all purposes other than trial based on a
finding that there exists a significant overlap between the legal and factual issues in the two
actions. (Doc. 29.) Unless otherwise indicated, all citations refer to the lead case, Case No.
1:16-cv-369.

I.

BACKGROUND
A. The Policies
Defendant Herman Grant Co., Inc. (“Herman Grant”) is a Tennessee corporation with its

principal place of business in Chattanooga, Tennessee. (Doc. 1.) Plaintiffs are insurance
companies that provided commercial general liability (“CGL”) and umbrella coverage to
Herman Grant during consecutive policy periods beginning in 2012 (collectively “the Policies”).
Plaintiff Columbia National Insurance Company (“Columbia”) issued CGL and umbrella
policies to Herman Grant for the policy period from July 1, 2012, to July 1, 2013. (Case No.
1:17-cv-116, Doc. 1, at 5.) Plaintiff Cincinnati Insurance Company (“Cincinnati”) issued CGL
and umbrella policies to Herman Grant for the policy periods beginning July 1, 2013. (Doc. 1, at
4.) The Policies are governed by Tennessee law and generally cover Herman Grant for “bodily
injury” and “property damage” caused by “occurrences” that took place within the coverage
territory during the coverage period. (Id. at 5–6; see also Case No. 1:17-cv-116, Doc. 1-1, at 23.)
B. The Underlying Transaction
In the summer of 2012, Superior Silica Sands, LLC (“Silica Sands”) contracted with a
Wisconsin company called Market & Johnson Inc. (“Market & Johnson”) to serve as general
contractor over construction of a dry sand processing plant used in hydraulic fracturing. (Case
No. 1:17-cv-116, Doc. 1, at 3.) Market & Johnson then subcontracted with Herman Grant to
design and construct a critical portion of the dry sand processing plant—the sand dryer. (Id.)
Herman Grant finalized the sand dryer project in January 2013. (Id.; see also Doc. 13-1, at 6.)
According to Silica Sands, it began noticing defects in the sand dryer almost immediately and
began notifying Herman Grant of those defects. (Doc. 1, at 3.) Specifically, “Silica Sands
claims it notified Herman Grant that the sand dryer’s wrapper bands or plates, tire spacer blocks,

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steel tires, flightings, and gear box were defective.” (Id.) Silica Sands alleges it attempted to
engage Herman Grant to resolve those defects in the sand dryer over the course of the next few
years. (See Doc. 1, at 3–5; see also Doc. 13-1, at 7–15.)
On June 17, 2016, Silica Sands filed a complaint in the Circuit Court for Barron County,
Wisconsin, against Herman Grant and Columbia (the “Wisconsin Action”). (Doc. 1-1.)
Although Cincinnati was not initially named as a defendant in the Wisconsin Action, Silica
Sands amended its complaint and added Cincinnati as a defendant on September 12, 2016.
(Docs. 1-1, 13-1.) In its amended complaint, Silica Sands alleges claims for breach of contract,
breach of warranty, negligence, and unjust enrichment against Herman Grant and liability claims
against Columbia and Cincinnati. (Doc. 13-1.)
On September 8, 2016, and April 27, 2017, respectively, Cincinnati and Columbia
(collectively “Plaintiffs”) filed their actions in this Court against Herman Grant pursuant to the
Declaratory Judgment Act, 28 U.S.C. § 2201, and Rule 57 of the Federal Rules of Civil
Procedure. (Doc. 1; Case No. 1:17-cv-116, Doc. 1.) Plaintiffs seek declaratory judgments that
Herman Grant is not entitled to coverage in the Wisconsin Action under the Policies. (Doc. 1, at
16; see also Case No. 1:17-cv-116, Doc. 1, at 11–12.) Herman Grant has filed motions to
dismiss in both actions. (Doc. 13; Case No. 1:17-cv-116, Doc. 14.) Plaintiffs have responded
(Doc. 20; Case No. 1:17-cv-116, Doc. 17) and Herman Grant has replied (Doc. 21). The motions
to dismiss are now ripe for review.
II.

ANALYSIS
Herman Grant moves to dismiss Plaintiffs’ complaints, arguing that the Court should

decline to exercise its discretion and decline to declare the rights of the parties under the
Declaratory Judgment Act, 28 U.S.C. §§ 2201–02 (the “DJA”). The DJA gives district courts

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the discretion to hear actions seeking to declare the rights or legal relations of interested parties
that fall within its purview. 28 U.S.C. § 2201 (“[I]n 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.”). “[F]ederal district courts in particular, have
unique and substantial discretion in deciding whether to declare the rights of litigants.” Western
World Ins. Co. v. Hoey, 773 F.3d 755, 758 (6th Cir. 2014). The sound administration of that
discretion “calls for the exercise of ‘judicial discretion, hardened by experience into rule.’” Id. at
759 (quoting Wilton v. Seven Falls Co., 515 U.S. 277, 289 (1995)).
The Sixth Circuit has articulated a series of factors, commonly known as the Grand
Trunk factors, to utilize in determining whether to exercise discretion to hear a case under the
DJA. Grand Trunk W.R. Co. v. Consol. Rail Corp., 746 F.2d 323, 326 (6th Cir. 1984). One of
these factors has been expanded into three sub-factors. Hoey, 773 F.3d at 759. Specifically, the
Court should consider:
(1) [w]hether the declaratory action would settle the controversy;
(2) whether the declaratory action would serve a useful purpose in clarifying the
legal relations in issue;
(3) whether the declaratory remedy is being used merely for the purpose of
“procedural fencing” or “to provide an arena for res judicata;”
(4) whether the use of a declaratory action would increase the friction between
our federal and state courts and improperly encroach upon state jurisdiction;
[which is determined by asking]
a. whether the underlying factual issues are important to an informed
resolution of the case;
b. whether the state trial court is in a better position to evaluate those
factual issues than is the federal court; and
c. whether there is a close nexus between underlying factual and legal
issues and state law and/or public policy, or whether federal common
or statutory law dictates a resolution of the declaratory judgment
action; and
(5) whether there is an alternative remedy which is better or more effective.

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Id.
A. Settlement of the Controversy & Clarification of the Legal Relations at Issue
The first and second Grand Trunk factors are closely linked and are often considered in
connection with one another. Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 557 (6th Cir. 2008)
(“[I]t is almost always the case that if a declaratory judgment action will settle the controversy,
then it will clarify the legal relations at issue.”). In the context of insurer suits to determine
policy liability, two lines of precedent have developed. See Hoey, 773 F.3d at 760–61; see also
Flowers, 513 F.3d 546. Under the first line, courts have concluded that a declaratory judgment
“settles the controversy” if it does not resolve the underlying state action but does resolve the
insurance coverage controversy. See Northland Ins. Co. v. Stewart Title Guar. Co., 327 F.3d
448, 454 (6th Cir. 2003); see also Flowers, 513 F.3d at 555–58. Similarly, courts have held that
the declaratory judgment “clarifies the legal relations at issue” if it clarifies the relationship
between the insured and insurer, even if it does not clarify the legal relationships in the
underlying action. West Am. Ins. Co. v. Prewitt, 208 F. App’x 393, 397 (6th Cir. 2006).
Conversely, in the second line of cases, courts have concluded that the declaratory
judgment action fails to “settle the controversy” unless it also satisfies the issues addressed in the
underlying state court action. See Bituminous Cas. Corp. v. J & L Lumber Co., 373 F.3d 807,
812–13 (6th Cir. 2004); see also Flowers, 513 F.3d at 555–58. Courts following this line have
also found that, though a declaratory judgment may clarify the legal relationship between the
parties to the insurance contract, “the judgment [does] not clarify the legal relationship between
[the parties] in the underlying state action.” Bituminous, 373 F.3d at 814. Although it has not
conclusively explained this divergence in case law, the Sixth Circuit has attributed the split to
competing policy considerations and “differences in factual circumstances presented by different

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cases.” Hoey, 773 F.3d at 760 (quoting Flowers, 513 F.3d at 555–56); see also Auto-Owners Ins.
Co. v. Sinor, No. 1:11-cv-27, 2011 WL 3489679 at *3–4 (E.D. Tenn. Aug. 9, 2011).
Courts have consistently found that certain factual circumstances disfavor hearing
declaratory judgment actions such as these. Often, courts have focused on the presence, or lack
thereof, of particularly critical parties from one action or another as well as on whether the scope
of insurance coverage was at issue in the underlying action. See Bituminous, 373 F.3d at 813–14
(highlighting that the plaintiff in the underlying state action was not a party to the federal action,
such that any federal judgment “would not be binding as to [the plaintiff] and could not be res
judicata in the tort action”); see also Northland Ins. Co., 327 F.3d at 454 (affirming a district
court’s exercise of jurisdiction when the plaintiffs in the federal action were not a party to the
underlying action and neither the scope of insurance coverage nor the obligation to defend was
before the state court).
In this instance, the first and second factors weigh strongly against hearing these cases.
Neither the primary plaintiff, Silica Sands, nor any of the other plaintiffs in the Wisconsin action
are named in either of the instant actions before this court.2 Further, Plaintiffs are named
defendants in the underlying state action. (Doc. 1-1.) Therefore, if the Court were to exercise its
discretion to hear this case, doing so would only have a limited effect on settling the controversy
or clarifying the legal relationships because it could introduce unnecessary res judicata issues
into the Wisconsin Action. See, e.g., United Specialty Ins. v. Seidenfaden’s LLC, No. 3:16-cv0190-CRS-CHL, 2016 WL 6078307, at *5 (W.D. Ky. Oct. 14, 2016). Further, despite Plaintiffs’
argument that coverage is not at issue in the Wisconsin litigation (see, e.g., Doc. 20, at 7), review

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In fact, Cincinnati admits it lacks personal jurisdiction over Silica Sands. (Doc. 20, at 8.)

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of the complaint from that action reveals otherwise.3 Thus, even if the Court exercised its
discretion and considered these actions, the collateral liability aspects of the proceedings would
continue in the state court regardless of this Court’s determination. See Allstate v. Mercier, 913
F.2d 273, 279 (6th Cir. 1990).
B. Procedural Fencing and Res Judicata
The third Grand Trunk factor considers whether the filing of these declaratory judgment
actions was motivated by “procedural fencing” or a race for res judicata in an attempt to create a
preclusive effect on the underlying action. Flowers, 513 F.3d at 558. District courts are
“reluctant to impute an improper motive to a plaintiff where there is no evidence of such in the
record.” Id. (citing Travelers, 495 F.3d at 272). “[W]hen the plaintiff has filed his claim after
the state court litigation has begun, we have generally given the plaintiff ‘the benefit of the doubt
that no improper motive fueled the filing of [the] action.’” Id. (citing Bituminous, 373 F.3d at
814.)
There is no evidence that Plaintiffs have attempted to engage in procedural fencing.
Herman Grant suggests that Columbia and Cincinnati filed these actions with an improper
motive because the cases were filed either after (Columbia), or immediately prior to (Cincinnati),
being named as defendants in the underlying state action. However, as Flowers indicates, even
though Plaintiffs clearly had knowledge of the Wisconsin Action prior to filing these actions, the
timing of these filings does not evidence improper motive. See Flowers, 513 F.3d at 558.
Accordingly, the Court finds that this factor slightly favors hearing the cases.

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(Doc. 13-1.) In the underlying action, Silica Sands makes separate liability claims against both
Columbia and Cincinnati under Wisconsin’s direct action and liability statutes.

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C. Federalism Concerns
The fourth Grand Trunk factor concerns principles of federalism and considers whether
hearing the case would increase friction between federal and state courts. The Supreme Court
has explained that “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 v.
Excess Ins. Co., 316 U.S. 491, 495 (1942). To aid in making this determination, the Sixth
Circuit has articulated three sub-factors for consideration:
(1) whether the underlying factual issues are important to an informed resolution
of the case;
(2) whether the state trial court is in a better position to evaluate those factual
issues than is the federal court; and
(3) whether there is a close nexus between the underlying factual and legal issues
and state law and/or public policy, or whether federal common or statutory law
dictates a resolution of the declaratory judgment action.
Bituminous, 373 F.3d at 814–15 (citing Scottsdale Ins. Co. v. Roumph, 211 F.3d 964, 968 (6th
Cir. 2000)).
The first sub-factor “focuses on whether the state court’s resolution of the factual issues
in the case is necessary for the district court’s resolution of the declaratory judgment action.”
Flowers, 513 F.3d at 560. For declaratory judgment actions over insurance contracts, “such
questions can sometimes be resolved as a matter of law and do not require factual findings by the
state court.” Id. (internal citations omitted). However, “sometimes resolution of the issues
raised in federal court will require making factual findings that might conflict with similar
findings made by the state court.” Id. (internal citations omitted). When the latter is true, “the
exercise of jurisdiction [is] inappropriate.” Id.

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The second sub-factor focuses on whether the state or federal court “is in a better position
to resolve the issues in the declaratory action.” Id. Often, federal courts consider state courts
better able to resolve the issues when state law controls. Seidenfaden’s LLC, 2016 WL 6078307,
at *5 (citing Travelers Indem. Co. v. Bowling Green Prof’l Assocs., PLC, 495 F.3d 266, 272 (6th
Cir. 2007)) (“[B]ecause Kentucky law is controlling, we conclude that Kentucky courts are in the
better position to apply and interpret its law on these issues.”). However, “when an insurance
company is not a party to the state court action, and neither the scope of insurance coverage nor
the obligation to defend is before the state court . . . a decision by the district court on these
issues would not offend principles of comity.” Flowers, 513 F.3d at 560 (internal citations
omitted).
The third sub-factor “focuses on whether the issue in the federal action implicates
important state policies and is, thus, more appropriately considered in state court.” Flowers, 513
F.3d at 561. Generally, “issues of insurance contract interpretation are questions of state law
with which the . . . state courts are more familiar and, therefore, better able to resolve.” Id.
(internal citations omitted). “The states regulate insurance companies for the protection of their
residents, and state courts are best situated to identify and enforce the public policies that form
the foundation of such regulation.” Id. (internal citations omitted). “However, not all issues of
insurance contract interpretation implicate such fundamental state policies that federal courts are
unfit to consider them.” Id. (citing Northland, 327 F.3d at 454).
In his case, the three sub-factors weigh against hearing these cases. While hearing the
action could certainly clarify at least some of the coverage issues, there is no question that
asserting jurisdiction would increase friction between federal and state courts. See Chelsea
Hearth & Fireplaces, Inc. v. Scottsdale Ins. Co., No. 15-cv-12240, 142 F. Supp. 3d 543, 547

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(E.D. Mich. Nov. 9, 2015). The pleadings do not highlight any particular factual issues that
would require state court resolution for the Court to issue declaratory judgment. However, that
does not foreclose such a possibility. In fact, as here, where the underlying contractual project
was quite complex—construction of a sand dryer to be used in hydraulic fracturing processes—
the Court finds that such an event is quite possible or even likely. See Mercier, 913 F.2d at 278–
79 (acknowledging that the federal court had a limited amount of information about the
underlying tort action and determining that there were necessary facts that would need to be
developed in the underlying action in order to settle the ultimate controversy, including the
insurance coverage issues).
Further, though the pleadings do not establish that the Wisconsin state court is necessarily
better able to resolve the coverage issues, they also do not suggest that this Court is an any more
appropriate forum. See Brillhart, 316 U.S. at 495. For instance, the cases do not appear to
present any novel questions of Wisconsin law and they involve policies that are governed by
Tennessee law. However, the cases also present no federal questions, and a single, unified
action—which involves all potentially affected parties—already exists in a forum that is at least
equally competent to address coverage issues already put before it. See Omaha Prop. & Cas.
Ins. Co. v. Johnson, 923 F.2d 446, 448 (6th Cir. 1991); see also Flowers, 513 F.3d at 560.4
Finally, as discussed herein, Wisconsin state law clearly emphasizes public policy considerations
that encourage resolving insurance disputes that affect Wisconsin entities in a single action.5 In

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The Court acknowledges Columbia’s argument that the Wisconsin court potentially lacks
general personal jurisdiction over it. (Case No. 1:17-cv-116, Doc. 18, at 13–16 (citing BNSF
Railway Co. v. Tyrell, 137 S. Ct. 810 (2017)).) However, because making such a finding would
amount to pure speculation by the Court, the Wisconsin court is in the best position to make such
a determination—further supporting the finding that the Wisconsin court is the more appropriate
forum at this juncture.
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See infra Part III(D).
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recognition of the Sixth Circuit’s clear concern about comity, the Court finds this factor weighs
against hearing these cases.
D. Alternative Remedy
The fifth Grand Trunk factor considers the availability of alternative remedies, such as
state declaratory judgments. Generally, “[a] district court should ‘deny declaratory relief if an
alternative remedy is better or more effective.’” Flowers, 513 F.3d at 562 (quoting Grand
Trunk, 746 F.2d at 326). However, consideration of this factor “must be fact specific, involving
consideration of the whole package of options available to the federal declaratory plaintiff.” Id.
Often, courts consider whether “[o]ne of the alternative remedies available to a federal
declaratory plaintiff is to seek a declaratory judgment in state court.” Id. Here, however, the
parties have largely focused on another alternative remedy—the direct action.
A “direct action” is “[a] lawsuit by a person claiming against an insured but suing the
insurer directly instead of pursuing compensation indirectly through the insured.” Black’s Law
Dictionary (8th ed. 2004). Wisconsin law provides “direct action”6 and “direct liability”7
statutes that, when considered together, enable an injured party to sue directly a liability
coverage provider for the negligence of the insured. See 3 Wis. Prac., Civil Procedure § 304.3
(4th ed.) (Negligence actions and insurers). Within the direct action, Wisconsin law permits a
liability insurance company to plead and establish a lack of coverage in a direct action.8

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Wis. Stat. Ann. § 803.04(2).

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Wis. Stat. Ann. § 632.24.

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At one time, Wisconsin appeared to require an insurer to plead and establish a lack of coverage
through the direct action. See New Amsterdam Casualty Co. v. Simpson, 300 N.W. 367, 369–70
(Wis. 1941) (establishing that separate declaratory judgment actions against insurers raising
coverage issues prior to the determination of the insured’s liability to a third party were
prohibited); see also Gulf Underwriters Ins. Co. v. Burris, 674 F.3d 999, 1005–06 (8th Cir.
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Here, because of the alternative remedies available to the parties under Wisconsin law,
the Court finds this factor weighs heavily against hearing these actions. The parties largely
disagree over the extent that Wisconsin’s “direct action” statutes apply. (Doc. 14, at 1–3, 5–7
(insisting Wisconsin’s direct action statutes require that the coverage issues be handled in the
Wisconsin state court); Doc. 20, at 3 (relying on Estates of Briney v. Mr. Heater Corp., No. 08cv-701-bbc, 602 F. Supp. 2d 997 (W.D. Wis. Feb. 25, 2009), to assert that Wisconsin law does
not permit a liability insurer to plead and establish a lack of coverage in the direct action itself).)
However, Wisconsin law is quite clear. Though Basten is explicit that declaratory judgment
actions are not barred in these instances under Wisconsin law, it also very unambiguously
confirms the state’s long-held preference for resolving insurance conflicts in single, unified
action that involves all affected parties. See Gulf Underwriters Ins. Co. v. Burris, 674 F.3d 999,
1006 (8th Cir. 2012); see also Fire Ins. Exch. v. Basten, 549 N.W.2d 690, 696 (Wis. 1996).
Further, because Columbia and Cincinnati are joined in the Wisconsin Action, the conditions
discussed by the Wisconsin Supreme Court highlighted as potentially appropriate for a
declaratory judgment are not present here. See Burris, 674 F.3d at 1006. Thus, this factor
strongly weighs against hearing these cases.
E. Balancing the Factors
The Sixth Circuit has advised that the “relative weight” of the factors depends heavily on
the “underlying considerations of efficiency, fairness, and federalism,” which vary depending on
the circumstances of each case. Hoey, 773 F.3d at 759. Here, given that four of the five Grand

2012). However, more recently, Wisconsin has declared that “‘the joinder or intervention of all
concerned parties followed by bifurcation of the coverage and liability issues . . . is the preferred
procedure to determine insurance coverage,’ but ‘coverage may be determined by . . . a separate
declaratory action’ when . . . the insurer was not joined in the underlying action.” Burris, 674
F.3d at 1006 (citing Fire Ins. Exch. v. Basten, 549 N.W.2d 690, 696 (Wis. 1996)).
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Trunk factors weigh against hearing these cases, the Court will decline to exercise its jurisdiction
over these matters.
III.

CONCLUSION
For the aforementioned reasons, the Court GRANTS Herman Grant’s motions to dismiss

(Case No. 1:16-cv-369, Doc. 13; Case No. 1:17-cv-116, Doc. 14) and DECLINES to exercise
jurisdiction over this declaratory judgment action. Accordingly, this action will be DISMISSED
WITHOUT PREJUDICE. Accompanying judgments will issue in each case.
SO ORDERED.
/s/ Travis R. McDonough
TRAVIS R. MCDONOUGH
UNITED STATES DISTRICT JUDGE

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