Aspen Specialty Insurance Company v. Southeast Title of Murfreesboro, LLC et al
MEMORANDUM. Signed by Chief Judge William J. Haynes, Jr on 6/9/14. (Attachments: # 1 Attachment - Searchable Memo)(DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(dt)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF TENNESSEE
ASPEN SPECIALTY INSURANCE
SOUTHEAST TITLE OF MURFREESBORO, )
LLC, et al.,
Chief Judge Haynes
Plaintiff, Aspen Specialty Insurance Company (“Apsen”), a North Dakota company with its
principal place of business in New York, filed this action under the federal diversity jurisdiction
statute, 28 U.S.C. §1332, against Defendants: Southeast Title of Murfreesboro, LLC, a Tennessee
limited liability corporation; Carla Dillard, a Tennessee citizen; and First Community Mortgage, Inc.
(“FCMI”), a Tennessee corporation with its principal place of business in Tennessee. (Docket Entry
No. 1). Plaintiff seeks declaratory relief under 28 U.S.C. §§ 2201 and 2202 to resolve whether the
insurance policy issued by Plaintiff Aspen to Defendants Southeast Title and Dillard applies to
claims arising out of Defendant FCMI’s Tennessee state court action against Southeast Title, Dillard
and other defendants, and seeks recoupment of costs and fees incurred in its defense of Southeast
Title and Dillard in the underlying state action. The Southeast Title Defendants filed an answer.
(Docket Entry No. 15).
At the initial case management conference on February 28, 2014, the Court, citing its
concerns over factual disputes in the underlying state action involving claims of negligence and theft,
administratively closed this action. (Docket Entry No. 20).
Before the Court is Plaintiff's motion to reopen and amend (Docket Entry No. 21), contending
that Plaintiff Aspen should be allowed to amend its complaint to reflect that the insurance policy
excludes from coverage claims based on the theft by a non-insured, specifically any claim that arises
out of the theft or conversion of mortgage funds “whether the alleged acts involve the Insured or any
other party” or any claim arising out of any alleged theft or conversion of mortgage funds “by any
person, at any time, under any circumstance.” (Docket Entry No. 1-1 at 9, ¶ E 11; at 14, ¶ GG).
Plaintiff also contends that coverage is excluded for any claims that the insureds knew of or could
have reasonably foreseen might give rise to a claim prior to the inception date of the policy.
In response (Docket Entry No. 23), Defendants contend that this action should not be
reopened and should remain administratively closed pending the outcome of the underlying state
court action as the underlying state court action asserts numerous grounds of liability, some of which
invoke the coverage provisions of the policy, and the issue of indemnification hinges on disputed
facts that must be decided in the underlying state court action. Defendants contend that the filing
of an amended complaint at this stage is premature.
In its reply (Docket Entry No. 26), Aspen asserts that resolution of the claims in Aspen’s
declaratory judgment action depends on issues that will not be presented to the state court in the
underlying action, that is, the state court will not consider whether the policy’s theft exclusions apply
or whether the Southeast Title had prior knowledge of the unlawful acts when it applied for the
policy. Aspen also asserts that if abstention were proper, the Court should dismiss the action, as
dismissal allows a plaintiff to appeal and avoid a period of legal uncertainty. Aspen further asserts
that actions seeking legal damages, such as recoupment, are protected from federal courts’ abstention
A. The State Action
In the proposed amended complaint (Docket Entry No. 21-1 at 35-43) in the underlying state
action, the allegations relevant as to the Southeast Title Defendants are, in sum, as follows: (1) that
Southeast Title and Dillard provided a title commitment letter to FCMI for the sale of a Tennessee
property, and that Southeast Title served as the settlement/escrow agent for the subject loan; (2) that
Southeast Title and Dillard negligently performed their closing and escrow duties; (3) that Southeast
Title and Dillard breached their contract with FCMI under the closing instructions, request for titled
commitment and settlement statements; (4) that Southeast Title and Dillard negligently made false
representations to FCMI regarding the receipt and disbursement of funds into and out of the account
established for the closing; and (5) that Southeast Title and Dillard breached their fiduciary duties
to FCMI. Id. at ¶¶ 16, 32; 38-41; 44-45; 46-49; 50-52.
B. The Federal Action
Plaintiff Aspen’s proposed amended complaint alleges that the insurance policy excludes
from coverage claims based on the theft by a non-insured and any claims that the insureds knew of
or could have reasonably foreseen might have given rise to a claim prior to the inception date of the
policy. In support, Plaintiff cites the “damages” definition that states, in relevant part:
Damages means a compensatory monetary amount for which an Insured may be
held legally liable, including judgments, awards, or settlements negotiated with the
prior approval of the Company, provided that Damages shall not include:
Any claim for money which is based upon, arises out of or is in consequence of any
theft, conversion, commingling, embezzlement or misappropriation by any person,
at any time, under any circumstances or escrow, trust, mortgage or any other kind or
type of money, funds securities, property, assets, or any negotiable instruments or
documents, whether the alleged acts involve the Insured or any other party.
(Docket Entry No. 21-1, at 18-19, III E. 11).
Plaintiff also cites the theft exclusion that states:
This Policy does not apply to any Claim based upon, arising out of, directly or
indirectly, in whole or in part, or in any way involving:
Any actual or alleged theft, stealing, conversion, commingling, embezzlement or
misappropriation of any kind of escrow, trust, mortgage or any other kind or type of
money, funds securities, property, assets, or any negotiable instruments or documents
by any person, at any time, under any circumstances.
Id. at 22, 24, IV. GG.
Lastly, Plaintiff cites the “prior knowledge” provision that provides, “Prior to the Inception
Date of this Policy, no Insured knew or could have reasonably foreseen that such Wrongful Act
might give rise to a Claim[.]” Id. at 16, I. D.
C. Conclusions of Law
The Declaratory Judgment Act provides 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, whether
or not further relief is or could be sought.” 28 U.S.C. § 2201(a). “Since its inception, the
Declaratory Judgment Act has been understood to confer on federal courts unique and substantial
discretion in deciding whether to 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.’” Id. at 287 (citations omitted). Thus, “[u]nder the Declaratory Judgment Act . . . the grant
of declaratory judgment is discretionary with the trial court.” Manley, Bennett, McDonald & Co.
v. St. Paul Fire & Marine Ins. Co., 791 F.2d 460, 462 (6th Cir. 1986).
The Sixth Circuit has “held on a number of occasions that a district court should stay or
dismiss complaints filed by insurance companies seeking a declaratory judgment as to their
underlying state court lawsuits.” Travelers Indem. Co. v. Bowling Green Professional Associates,
PLC, 495 F.3d 266, 273 (6th Cir. 2007). Moreover, the Sixth Circuit has stated that it “‘question[s]
the need for . . . declaratory judgments in federal courts when the only question is one of state law
and when there is no suggestion that the state court is not in a position to define its own law in a fair
and impartial manner.’” Bituminous Cas. Corp. v. J & L Lumber Co., Inc., 373 F.3d 807, 816-17 (6th
Cir. 2004) (quoting Am. Home Assur. Co. v. Evans, 791 F.2d 61, 63 (6th Cir.1986)). Further,
declaratory judgment actions “‘should normally be filed, if at all, in the court that has jurisdiction
over the litigation which gives rise to the indemnity problem. Otherwise confusing problems of
scheduling, orderly presentation of fact issues and res judicata are created.’” Id. at 812 (citation
omitted). Of course, there is not “a per se rule against exercising jurisdiction in actions involving
insurance coverage questions.” Id. at 812-13.
To determine whether to entertain jurisdiction in a declaratory judgment action, the district
court should consider whether the judgment “‘will serve a useful purpose in clarifying and settling
legal relationships in issue’ and whether it ‘will terminate and afford relief from the uncertainty,
insecurity, and controversy giving rise to the proceeding.’” Aetna Casualty & Sur. Co. v. Sunshine
Corp., 74 F.3d 685, 687 (6th Cir. 1996) (quoting Grand Trunk W. R.R. Co. v. Consolidated Rail
Corp., 746 F.2d 323, 326 (6th Cir. 1984) (internal quotation marks and citation omitted)). Under
these two broad principles, Court considers five factors to determine whether to entertain such an
(1) whether 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 a race for res judicata;”
(4) whether the use of a declaratory action would increase friction between our
federal and state courts and improperly encroach upon state jurisdiction; and
(5) whether there is an alternative remedy which is better or more effective.
Scottsdale Ins. Co. v Flowers, 513 F.3d 546, 554 (6th Cir. 2008) (quoting Grand Trunk,746 F.2d at
To determine the fourth factor, “whether the use of a declaratory action would increase
friction between our federal and state courts and improperly encroach upon state jurisdiction,” the
Sixth Circuit has applied three sub-factors that bear on federalism concerns to be considered:
(1) whether the underlying factual issues are important to an informed resolution of
(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 law or statutory law
dictates a resolution of the declaratory judgment action.
Travelers, 495 F.3d at 271 (quoting Scottsdale Ins. Co. v. Roumph, 211 F.3d 964, 968 (6th Cir.
As to the first two factors, as stated previously by the Court, the Court believes that based
upon the allegations in the underlying action that a resolution of the proposed amended complaint
in the federal action would benefit by a more fully developed factual record regarding the claims for
theft and negligence in the underlying action. Moreover, Plaintiff Aspen’s claim as to the Southeast
Title Defendants’ “prior knowledge” is a factual matter. At this juncture, the Court cannot determine
“whether the declaratory action would settle the controversy” or “would serve a useful purpose in
clarifying the legal relations in issue.” Thus, the Court concludes that these two factors weigh in
favor of the Defendants.
As to the third factor, “[t]he third factor is meant to preclude jurisdiction for ‘declaratory
plaintiffs who file their suits mere days or weeks before the coercive suits filed by a “‘natural
plaintiff’” and who seem to have done so for the purpose of acquiring a favorable forum.’” Flowers,
513 F.3d at 558 (quoting AmSouth Bank v. Dale, 386 F.3d 763, 788 (6th Cir.2004)). Thus, “[t]he
question is . . . whether the declaratory plaintiff has filed in an attempt to get her choice of forum by
filing first.” AmSouth, 386 F.3d at 789. Courts “are reluctant to impute an improper motive to a
plaintiff where there is no evidence of such in the record.” Flowers, 513 F.3d at 558 (citations
omitted). The Sixth Circuit has noted that “when 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. at 558 (quoting Bituminous, 373 F.3d at 814).
Therefore, “[a] district court should not deny jurisdiction to a plaintiff who has not ‘done any more
than choose the jurisdiction of federal rather than state court, a choice given by Congress.’” Id.
As there is no evidence of an improper motive on the current record, the Court concludes that
this factor weighs in favor of Plaintiff Aspen.
With respect to the fourth factor and its first two sub-factors, the Court concludes that the
state court’s resolution of the underlying factual disputes as to FCMI’s allegations of theft and
negligence is necessary for this Court to reach an informed resolution of the declaratory judgment
and that the state trial court is in a better position to evaluate those factual disputes. Moreover,
Plaintiff Aspen acknowledges that Tennessee courts have not expressly addressed the application
of the policy’s provisions at issue. (Docket Entry No. 22 at 4). This Court believes that a well
developed record may also aid the Court on this issue.
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.
The Sixth Circuit has noted that the “issues of ‘insurance contract interpretation are questions of
state law’” in which state courts are more familiar and in a better position to resolve. Travelers, 495
F.3d at 273 (quoting Bituminous, 373 F.3d at 815). The Sixth Circuit has observed that “‘[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,
373 F.3d at 815 (quoting Allstate Ins. v. Mercier, 913 F.2d 273, 279 (6th Cir. 1990)). Accordingly,
the Court concludes that this factor weighs in favor of the Defendants.
With respect to the final factor, “whether there is an alternative remedy which is better or
more effective,” a party can seek declaratory judgment in Tennessee state courts. Tenn. Code. Ann.
§§ 29-14-101 to 29-14-113. Thus, Plaintiff Aspen could have presented its contentions to the same
court that will decide the underlying state action. “Given that the issues presented involve questions
of state law only, the state court is also in a superior position to resolve the case.” Bituminous, 373
F.3d at 816 (noting that a superior alternative remedy also existed in the form of an indemnity action
filed at the conclusion of the underlying state action). Moreover, this action “is in federal court
based on diversity jurisdiction, there is no federal question involved, and the federal court is applying
state law.” West American Ins. Co. v. Prewitt, 208 F. App’x 393, 400 (6th Cir. 2006). Thus, the
Court concludes that this factor weighs in favor of the Defendants.
For these reasons, the Court reaffirms its decision to stay this action. “Consistent with the
nonobligatory nature of the [declaratory judgment] remedy, a district court is authorized, in the sound
exercise of its discretion, to stay or to dismiss an action seeking a declaratory judgment before trial
or after all arguments have drawn to a close.” Wilton, 515 U.S. at 288. The Supreme Court has
noted that “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, for any reason, fails to resolve the matter in controversy.” Id. at 288 n.2;
Carroll v. City of Mount Clemens, 139 F.3d 1072 (6th cir. 1998) (concluding that Younger abstention
applied to a federal action seeking only monetary damages and remanding action to the district court
to stay those claims under Younger); Liberty Mut. Fire Ins. Co. v. Bohms, No. 1:10-cv-1158, 2011
WL 3268608, at *8 n.5 (W.D. Mich. July 29, 2011) (“The Supreme Court has noted that, when a
district court declines the exercise of declaratory judgment jurisdiction to allow parties to pursue
other remedies, a stay will often be preferable to dismissal as that would allow the federal action to
proceed even if a state case is time-barred.”) (citing Wilton, 515 U.S. at 288).
Accordingly, the Court concludes that Plaintiff's motion to reopen and amend (Docket Entry
No. 21), should be denied without prejudice.
An appropriate order is filed herewith.
ENTERED this the
day of June, 2014.
William J. Haynes, Jr.
Chief United States District Judge
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