Certain Underwriters at Lloyd's London v. Cress et al - TV1

Filing 18

ORDER that the Court GRANTS Defendants Gerald Cress, Cress Company, Inc. and Cress Development, LLCs Motion to Dismiss and/or, In the Alternative, Motion for More Definite Statement 10 to the extent that the Court DISMISSES this a ction for lack of jurisdiction. In light of this ruling, plaintiff CertainUnderwriters at Lloyds London is DIRECTED to show cause within fourteen (14) days of entry of this memorandum opinion and order why the Order Granting Plaintiffs Motion for Default Judgment Against Defendants David Brown and Betty J. Brown 17 should not be vacated. Signed by Chief District Judge Thomas A Varlan on 11/7/13. (ABF)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TENNESSEE
AT KNOXVILLE
CERTAIN UNDERWRITERS AT
LLOYD’S LONDON,
Plaintiff,
v.
GERALD CRESS, et al.,
Defendants.

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No.: 3:13-CV-180-TAV-HBG

MEMORANDUM OPINION AND ORDER
This civil action is before the Court on Defendants’ Gerald Cress, Cress Company,
Inc. and Cress Development, LLC’s Motion to Dismiss and/or, In the Alternative, Motion
for More Definite Statement [Doc. 10].

Plaintiff filed a response [Doc. 12], and

defendants replied [Doc. 13]. After careful consideration of the parties’ briefs and the
relevant law, the Court will grant the motion.
I.

Background
On or about May 20, 2011, defendants David Brown and Betty J. Brown entered

into a contract with defendant Cress Company, Inc. (“Cress Company”) for the
construction of a new house at 445 Water View Drive, Rockwood, Tennessee 37854
[Doc. 1 ¶ 10]. Shortly thereafter, plaintiff Certain Underwriters at Lloyd’s London
(“Underwriters”) and Cress Company became parties to an insurance contract issued by
Underwriters that was in effect from November 9, 2011, through November 9, 2012 (the
“Policy”) [Id. ¶ 9].

On or about November 13, 2012, the Browns initiated a lawsuit against Gerald
Cress, Cress Company, Inc., and Cress Development, LLC (the “Cress Defendants”) in
the Circuit Court of Tennessee for the Ninth Judicial District at Rockwood, docket
number 12-CV-205, alleging that the Cress Defendants, and/or their subcontractors,
refused to abide by the terms of the contract, failed to complete the work described in the
contract, failed to adhere to the architectural designs for the new house, engaged in poor
workmanship, and utilized poor-quality materials, which rendered the house unfit for use
as a residence, structurally unsound, and valueless for resale (the “Lawsuit”) [Id. ¶¶ 11–
12; see also id. ¶¶ 13–15].

They assert causes of action for breach of contract,

negligence, fraud, misrepresentation, outrageous conduct, theft, negligent infliction of
emotional distress, breach of express and implied warranties, and violations of the
Tennessee Consumer Protection Act [Id. ¶ 17].
About one month later, Cress Company, Inc. and Cress Development, LLC
submitted a General Liability Notice of Occurrence/Claim to Underwriters with respect
to the Brown’s claims [Id. ¶ 18].

Underwriters commenced this action seeking a

declaratory judgment with respect to “whether Underwriters have a duty to defend and
indemnify the Cress Defendants in the Lawsuit pursuant to the Policy” [Id. ¶ 19].
In response to the complaint, the Cress Defendants move the Court to dismiss this
action, arguing “it is not appropriate for this Court to exercise jurisdiction under the
Declaratory Judgment Act” [Doc. 10]. Alternatively, the Cress Defendants move the
Court, pursuant to Rule 12(e) of the Federal Rules of Civil Procedure, to require plaintiff
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to provide a more definite statement of its claims because the complaint, particularly
paragraphs 33(l) through 34, is so vague or ambiguous that the Cress Defendants cannot
reasonably prepare a response [Id.].1
II.

Analysis
The Declaratory Judgment Act states that “[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.” 28 U.S.C. § 2201. This Act confers jurisdiction, but it does not
compel it. Brillhart v. Excess Ins. Co., 316 U.S. 491, 494 (1942); Bituminous Cas. Corp.
v. J & L Lumber Co., 373 F.3d 807, 812 (6th Cir. 2004); see also Wilton v. Seven Falls
Co., 515 U.S. 277, 286 (1995).

Accordingly, even when all other jurisdictional

requirements have been met, a district court is not required to exercise jurisdiction and
may dismiss a declaratory judgment action. Wilton, 515 U.S. at 287–88.
In determining whether to exercise jurisdiction over a declaratory action, the Court
must consider the five-part test established by the Sixth Circuit:
(1) whether the judgment would settle the controversy; (2) whether
the declaratory judgment action 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 for res judicata”; (4) whether the
use of a declaratory action would increase the friction between our
federal and state courts and improperly encroach on state
jurisdiction; and (5) whether there is an alternative remedy that is
better or more effective.
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The Cress Defendants state that the complaint fails to state a claim upon which relief
can be granted, but they make no argument in this regard [See Docs. 10, 11]. As a result, the
Court does not consider whether the complaint states a claim upon which relief may be granted.
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Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 554 (6th Cir. 2008) (citation omitted). A
district court is vested with “unique and substantial” discretion in determining whether to
exercise jurisdiction. Id. at 563.
A.

Settlement of the Controversy and Clarification of Legal Relations

As this Court has noted before, see State Auto. Mut. Ins. Co. v. Frazier’s Flooring,
Inc., No. 3:08-CV-178, 2009 WL 693142, at *2–3 (E.D. Tenn. Mar. 13, 2009), there is a
split within the Sixth Circuit regarding these factors. One line of cases suggests that the
declaratory judgment action must settle the entire controversy that is ongoing in state
court and clarify the legal relationship between all the parties. See Travelers Indem. Co.
v. Bowling Green Prof’l Assocs., 495 F.3d 266, 271 (6th Cir. 2007). Another line of
cases suggests that the declaratory judgment need only settle the controversy and clarify
the relations between those involved in the declaratory judgment action. See Northland
Ins. Co. v. Stewart Title Guar. Co., 327 F.3d 448, 454 (6th Cir. 2003).
In trying to reconcile the two lines of cases, one district court within the Sixth
Circuit found that the historical background of the factors indicates that the first two
factors are meant to address distinct issues. See Grange Mut. Cas. Co. v. Safeco Ins. Co.,
565 F. Supp. 2d 779, 788 (E.D. Ky. 2008). The court determined that history shows that
the first factor is meant to address whether the declaratory judgment action will settle the
ultimate controversy while the second factor is meant to address the usefulness of the
action in clarifying the discrete legal relations at issue within the declaratory judgment

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action. Id. The Court has previously agreed with this reconciliation and finds no reason
to depart from that decision in this case.
Here, the declaratory action will determine only if Underwriters has a duty to
defend, and if necessary, indemnify Cress Company in the action pending in state court;
it will not determine the ultimate controversy between the Browns and the Cress
Defendants. The first factor thus weighs against exercising jurisdiction. The second
factor, however, weighs in favor of exercising jurisdiction because it will clarify the legal
relations at issue within this action.
B.

Procedural Fencing and Res Judicata

The Sixth Circuit disfavors declaratory actions when they “could frustrate a
plaintiff’s choice of forum and encourage forum shopping, races to the courthouse,
needless litigation occasioning waste of judicial resources, delay in the resolution of
controversies, and misuse of the judicial process to harass an opponent in litigation.”
NGS Am., Inc. v. Jefferson, 218 F.3d 519, 523 (6th Cir. 2000). The Court should not,
however, “impute an improper motive . . . where there is no evidence of such in the
record.” Scottsdale Ins. Co., 513 F.3d at 558. In Scottsdale, the Sixth Circuit found that
an insurance company that filed a declaratory injunction action was not in a race to
judgment when it was not a party to the state-court action, and thus, the issue of its
coverage was not before the state court. Id.
That is the case here. There is no evidence of an improper motive regarding forum
shopping or a race to judgment; indeed, the Cress Defendants concede they have no
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evidence that would establish an improper motive. Moreover, Underwriters is not a party
to the state-court action; thus, the issue of whether it must defend or indemnify the Cress
Defendants is not before the state court. Accordingly, this factor weighs in favor of
exercising jurisdiction.
C.

Increase of Friction and Improper Encroachment

There are three sub-factors the Court must consider in determining whether the
exercise of jurisdiction would increase friction between federal and state courts:
(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 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.
Scottsdale Ins. Co., 513 F.3d at 560; Bituminous Cas. Corp., 373 F.3d at 814–15.
The first sub-factor requires to the Court to determine if there is an overlap
between the factual findings that it must reach in the resolution of the issues raised in the
declaratory judgment action and the factual findings that the state court must reach in
resolving the underlying issues in that court. See Scottsdale Ins. Co., 513 F.3d at 560;
Travelers Indem. Co., 495 F.3d at 272. If there are common factual findings required,
then the federal and state courts could reach conflicting conclusions, and the exercise of
jurisdiction would be inappropriate. Scottsdale Ins. Co., 513 F.3d at 560; Travelers
Indem. Corp., 495 F.3d at 272.
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The parties have conflicting views about this sub-factor. Underwriters contends
that “the issues to be decided by the state court in the Underlying Lawsuit and by this
Court in this declaratory judgment action are separate and distinct,” as “[t]he issues to be
decided by the state court are whether the Cress Defendants are liable for damages to the
Browns for the Cress Defendants’ alleged failure to adhere to the architectural design,
alleged poor workmanship, and alleged installation of poor quality materials during the
construction of the Browns’ house” and the issues to be decided by this Court “are
whether there has been ‘property damage’ or an ‘occurrence’ within the meaning of the
policy and whether the policy exclusion for property damage to impaired property applies
to exclude coverage” [Doc. 12]. The Cress Defendants agree that “whether there has
been ‘property damage’ or an ‘occurrence’ triggering Underwriters’ duty to defend and
indemnify the Cress Defendants under the Policy” is the issue in this case, but that there
will be no duty to defend if the “property damage arose out of the operations or work of
the Cress Defendants” [Doc. 13]. Thus, their argument goes, “to determine whether
Underwriters had a duty to defend and indemnify the Cress Defendants under the policy,
this Court must resolve factual issues regarding whether the Browns’ property was
damaged and whether that property damage resulted from the operations or work of the
Cress Defendants,” the very issue of the state-court action [Id.].
Upon review of the record, the Court agrees with the Cress Defendants’ statement
of the issues and finds that this court and the state-court could reach conflicting
conclusions on the issue of whether the property damage was a result of the Cress
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Defendants’ work, which an issue before the state court. Moreover, while the Court can
rely upon the factual allegations in the complaint with respect to whether Underwriters
has a duty to defend, “the duty to indemnify is based upon the facts found by the trier of
fact.” Travelers Indem. Co. v. Moore & Assocs., Inc., 216 S.W.3d 302, 30 (Tenn. 2007)
(citation omitted). For this reason, federal courts decline to exercise jurisdiction when
faced with indemnification claims, as here. See Founders Ins. Co. v. Bentley Ent., LLC,
No. 3:12-cv-01315, 2013 WL 3776311, at *10 (M.D. Tenn. July 17, 2013).
In considering the second sub-factor, the Court looks at whether the federal or
state court is in a better position to resolve the issues in the declaratory action. See
Scottsdale Ins. Co., 513 F.3d at 560. Here, the Court finds that the state court is in a
better position to resolve the issues in this declaratory judgment action because the
evidence regarding the alleged property damage, and whether the Cress Defendants were
the cause of that damage, will be presented in connection with the state proceeding.
The Court’s consideration of the third sub-factor is similar to that of the second
sub-factor in that the Court must determine “whether the issue in the federal action
implicates important state policies, and is, thus, more appropriately considered in state
court.”

Scottsdale Ins. Co., 513 F.3d at 561.

In regard to insurance contract

interpretation, state courts are generally considered the better forum because, “‘[s]tates
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.’” Bituminous Cas. Corp., 373 F.3d at 815 (citation omitted).
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After considering all of the sub-factors together, the Court determines that
exercising jurisdiction over the declaratory judgment action would create friction
between federal and state courts. Accordingly, this factor weighs against exercising
jurisdiction.
D.

Alternative Remedy

Tennessee law provides that, “Courts of record within their respective jurisdictions
have the power to declare rights, status, and other legal relations whether or not further
relief is or could be claimed.” Tenn. Code Ann. § 29-14-102. There is, therefore, an
alternative remedy in this case because a declaratory judgment could be obtained in
Tennessee state court. The Sixth Circuit, however, is split regarding whether the statecourt remedy must be better or more effective than a federal declaratory action or simply
provide an alternative remedy for the purposes of this factor. See Scottsdale, 513 F.3d at
562 (“As with the first two factors, our precedent is split regarding whether the
possibility of seeking a declaratory judgment or an indemnity action in state court
counsels against the district court exercising jurisdiction.”). Regardless, the Sixth Circuit
has said in an unpublished opinion that, as here, “the state court is a better forum [when]
there is no federal interest triggered by [the] litigation.” W. Am. Ins. Co. v. Preweitt, 208
F. App’x 393, 400 (6th Cir. 2006).
In sum, the Court finds the balance of these factors weighs against exercising
jurisdiction.2
2

In light of this finding, the Court need not address defendants’ alternative request for a
more definite statement.
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III.

Conclusion
For the reasons explained, the Court hereby GRANTS Defendants’ Gerald Cress,

Cress Company, Inc. and Cress Development, LLC’s Motion to Dismiss and/or, In the
Alternative, Motion for More Definite Statement [Doc. 10] to the extent that the Court
DISMISSES this action for lack of jurisdiction. In light of this ruling, plaintiff Certain
Underwriters at Lloyd’s London is DIRECTED to show cause within fourteen (14) days
of entry of this memorandum opinion and order why the Order Granting Plaintiff’s
Motion for Default Judgment Against Defendants David Brown and Betty J. Brown
[Doc. 17] should not be vacated.
IT IS SO ORDERED.

s/ Thomas A. Varlan
CHIEF UNITED STATES DISTRICT JUDGE

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