Indemnity Insurance Corporation v. Austin Lucky Lounge, LP et al
REPORT AND RECOMMENDATIONS re 5 Motion to Dismiss, filed by Kyle Cox, William Muntz, Austin Lucky Lounge GP, LLC, Kenneth George Blank, Austin Lucky Lounge, LP. Signed by Judge Andrew W. Austin. (jk, )
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
INDEMNITY INS. CORP., f/k/a
INDEMNITY INS. CORP. OF D.C., RRG
AUSTIN LUCKY LOUNGE, LP, et al.
REPORT AND RECOMMENDATION
OF THE UNITED STATES MAGISTRATE JUDGE
THE HONORABLE LEE YEAKEL
UNITED STATES DISTRICT JUDGE
Before the Court are: Defendants’ Motion to Dismiss, or in the Alternative, Motion to Stay
(Clerk’s Doc. No. 5) filed July 20, 2011; Plaintiff’s Response to Defendants’ Motion to Dismiss or
Stay (Clerk’s Doc. No. 11) filed August 16, 2011; and Defendants’ Reply in Support of Their
Motion to Dismiss, or in the Alternative, Motion to Stay (Clerk’s Doc. No, 15) filed August 23,
2011. The District Court referred these Motions to the undersigned Magistrate Judge for report and
I. FACTUAL BACKGROUND
This is a declaratory judgment action in which Indemnity Insurance Corporation (“Plaintiff”
or “Indemnity”) is seeking a determination of its duty to defend and indemnify Lucky Lounge, LP,
Austin Lucky Lounge GP, LLC, Kenneth George Blank, William Muntz, and Kyle Cox (collectively
“the Lucky Lounge Defendants”) for claims asserted in a state court personal injury suit filed in
Travis County, Texas. The case is before the Court based on a claim that there is diversity of
citizenship among the parties.
Kyle Cox filed his Original Petition in the Underlying Suit on November 18, 2010. Kyle Cox
v. Austin Lucky Lounge, LP, Austin Lucky Lounge GP, LLC, Kenneth George Blank and William
Muntz, Cause No. D-1-GN-10-004058, in the 345th Judicial District Court of Travis County, Texas.
Cox alleges he was severely and permanently injured as a result of an incident that occurred at the
Lucky Lounge on February 27, 2010, and states causes of action for negligence, gross negligence,
vicarious liability, premises defect, and false detention and defamation. In his suit, Cox claims that
while being ejected from the back door of the bar by Lucky Lounge employees, he fell down several
concrete steps, where he landed on his head, lost consciousness, and began bleeding from his ear.
He alleges the Lucky Lounge employees returned inside and left him bleeding and unconscious on
the sidewalk. Cox seeks personal injury damages including future medical expenses, past and future
physical pain and suffering, past and future mental anguish, past and future physical impairment,
future disfigurement, past and future lost wages and income earning capacity.
Defendant Lucky Lounge, LP, is the named insured under Commercial General Liability
Policy No. 6000712 (“the Policy”) issued by Indemnity. The Policy contains an Exclusion for
assault and/or battery. Prior to Cox filing his state court action, Indemnity was notified of and
investigated Cox’s claims. On March 31, 2010, Indemnity sent Lucky Lounge, LP, a Denial of
Coverage and Reservation of Rights, denying any duty to defend or indemnify Cox’s claims. The
letter stated that Indemnity,
has reviewed this matter and expressly denies any duty or obligation to indemnify
and/or defend Lucky Lounge for any ‘bodily injury’ or ‘property damage’ arising
from assault and/or battery. The insurer understands that despite the foregoing, it
may nevertheless be obligated to provide Lucky Lounge with a defense against
certain other allegations asserted by Claimant.
See Exhibit B to Defendants’ Motion to Dismiss. The letter also stated “Due to the reservation of
rights aforesaid, you may have the right to be defended by counsel of its [sic] own choosing in this
Lucky Lounge, LP, then hired counsel, who wrote a letter on April 12, 2010, stating that he
understood Indemnity’s notice to Lucky Lounge to state that Indemnity would provide and pay for
Lucky Lounge’s defense under a reservation of rights, and further asking Indemnity to let him know
if he was mistaken about Indemnity’s position on paying for the defense. See Exhibit C to
Defendants’ Motion to Dismiss. The letter also generally disputed the coverage decision, and
asserted that the underlying suit also brought negligence claims which squarely fell within the
coverage terms of the Policy. The letter fully reserved the Insured’s rights under the Policy to both
a defense and coverage, and requested Indemnity to meet those duties. Id.
On August 23, 2010, Lucky Lounge, LP’s counsel forwarded to Indemnity a demand and
offer of settlement from Cox’s counsel, and demanded that Indemnity provide a defense and
coverage for the claims. See Exhibit D to Defendants’ Motion to Dismiss. The demand letter stated
that Lucky Lounge employees had negligently pushed Cox out of the bar. Id. Indemnity responded
by denying any duty to defend or indemnify under the Policy, asserting that the occurrence involved
an intentional act not covered by the Policy, and/or assault and/or battery. In stating this position,
Indemnity pointed out that Lucky Lounge security employee Kenny Blanks was charged with second
degree felony assault with serious bodily injury after the incident. See Exhibit E to Defendants’
Motion to Dismiss.
Lucky Lounge’s counsel then threatened legal action against Indemnity for its refusal to
defend or indemnify, and retained separate counsel on the coverage issue. After Cox filed suit in
state court, the coverage counsel sent a letter to Indemnity demanding defense and indemnity of the
claims in the state court suit. See Exhibit G to Defendants’ Motion to Dismiss. On February 3,
2011, now apparently understanding that Cox was removed from the bar because he was intoxicated
and fell while leaving, Indemnity agreed to pay defense costs, although it continued to deny any duty
to indemnify Lucky Lounge and to reserve its rights. See Exhibit H to Defendants’ Motion to
Dismiss. Subsequently, Indemnity failed to respond to invoices for defense costs, and failed to
acknowledge Lucky Lounge’s retention of Michael Burnett as counsel. See Exhibits I, J, and K to
Defendants’ Motion to Dismiss. Indemnity thereafter filed this declaratory judgment action on May
On July 11, 2011, the Lucky Lounge Defendants filed suit against Indemnity and Cox in
Texas state court.1 In that case, the Lucky Lounge Defendants make claims against Indemnity for
breach of contract, declaratory judgment, breach of the duty of good faith and fair dealing, violations
of the Texas Insurance Code, violations of the Texas Deceptive Trade Practices Act, and promissory
estoppel. They also seek a declaration that Indemnity has a duty to defend the Lucky Lounge
Defendants in Cox’s state court personal injury action, along with certain other defense costs.
The Lucky Lounge Defendants now move this Court to use its discretion to dismiss, or
alternatively, to stay the case before it.
II. MOTION TO DISMISS
The Declaratory Judgment Act provides that the Court “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(a) (emphasis added). 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, 288 (1995). Thus, a district
court possesses “broad discretion to grant (or decline to grant) declaratory judgment.” Id. at 281. “In
Austin Lucky Lounge, LP, Austin Lucky Lounge, GP, LLC, William Muntz, and Kenneth
George Blank v. Indemnity Insurance Corp., f/k/a Indemnity Insurance Corp. of DC, RRG and Kyle
Cox, Cause No. D-1-GN-11-002076 in the 53rd District Court, Travis County, Texas.
the declaratory judgment context, the normal principle that federal courts should adjudicate claims
within their jurisdiction yields to considerations of practicality and wise judicial administration.”
Id. at 288. The Supreme Court has stated 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 . . . between the same parties.” Brillhart v. Excess Insurance Co. of
America, 316 U.S. 491, 495 (1942).
In Orix Credit Alliance, Inc. v. Wolfe, 212 F.3d 891 (5th Cir. 2000), the Fifth Circuit set out
a three-step process for district courts to follow in deciding whether to dismiss a declaratory
judgment action. Sherwin–Williams Co. v. Holmes County, 343 F.3d 383, 387 (5th Cir. 2003). The
steps require a district court to determine: “(1) whether the declaratory action is justiciable;
(2) whether the court has the authority to grant declaratory relief; and (3) whether to exercise its
discretion to decide or dismiss the action.” Id. In this case, the parties do not dispute the first two
factors. Because there is no dispute that the declaratory action is justiciable and that the Court has
the authority to grant declaratory relief, the motion turns on whether the Court should exercise its
discretion to decide the case.
The Trejo factors
In St. Paul Ins. Co. v. Trejo, 39 F.3d 585 (5th Cir. 1994), the Fifth Circuit identified several
factors which should be considered by a district court in determining how to exercise its discretion
in a declaratory judgment action:
whether there is a pending state action in which all of the matters in controversy can
be fully litigated;
whether the plaintiff filed in anticipation of a lawsuit by the defendant;
whether the plaintiff engaged in forum shopping in bringing the suit;
whether possible inequities in allowing the declaratory plaintiff to gain precedence
in time or to change forums exist;
whether the federal court is a convenient forum for the parties and witnesses;
whether retaining the lawsuit in federal court would serve the purposes of judicial
whether the federal court is being called on to construe a state judicial decree
involving the same parties and entered by the court before whom the parallel state
suit between the same parties is pending.
Id. at 590. These factors are not exhaustive, mandatory or exclusive. Granite State Ins. Co. v. Tandy
Corp., 986 F.2d 94 (5th Cir. 1992)). In Sherwin–Williams, the Fifth Circuit noted that the Trejo
factors are designed to address three fundamental considerations: (1) proper allocation of
decision-making between state and federal courts, (2) fairness, and (3) efficiency. 343 F.3d at 390.
Application of the Trejo factors
The first factor, whether there is a pending state action in which all of the matters in
controversy may be fully litigated, favors dismissal. “If [a] federal declaratory judgment action
raises only issues of state law and a state case involving the same state law issues is pending,
generally the state court should decide the case and the federal court should exercise its discretion
to dismiss the federal suit.” Sherwin–Williams Co., 343 F.3d at 390–91. Indemnity argues that the
“central claim” in the federal court action—Indemnity’s duty to indemnify, is not included in the
state court action. The Lucky Lounge Defendants respond that Indemnity’s duty to indemnify is
dependent upon the outcome of the state court personal injury suit filed by Cox; and, regardless, they
have amended their state court petition to include the duty to indemnify claim. Additionally, the
standard is “whether there is a pending state action in which all the matters in controversy may be
fully litigated.” Trejo, 39 F.3d at 590 (emphasis added). Indemnity has identified no impediment
to the inclusion of all parties and issues in the state court action. See United States Fidelity v.
Blevins, 979 F.2d 1535 (5th Cir. 1992) (affirming district court’s decline of jurisdiction where
insurer not a present party to state court action).
The second, third, and fourth Trejo factors—whether Indemnity filed suit in anticipation of
being sued, whether it engaged in forum shopping, and whether there are inequities in letting
Indemnity’s suit to proceed in lieu of Lucky Lounge’s—are inter-related, and will thus be addressed
together. It appears that Indemnity filed the federal action in anticipation of litigation, and in an
attempt to get a “jump” on any suit Lucky Lounge might file. The Lucky Lounge Defendants assert
that Indemnity affirmatively misled them by stating it would provide a defense, and then instead filed
this declaratory judgment action asserting it had no duty to defend or indemnify. The facts set out
in the pleadings support this. At the time it filed suit, Indemnity knew Lucky Lounge was
investigating legal options and had hired coverage counsel. Further, filing an anticipatory suit is a
type of forum-shopping. Mission Ins. Co. v. Puritan Fashions Corp., 706 F.2d 599, 602 (5th Cir.
1983); see also Granite State Ins. Co. v. Tandy Corp., 986 F.2d 94, 96 (5th Cir. 1992) (affirming
determination that the declaratory judgment complaint was filed in anticipation of litigation where
the parties had engaged in lengthy negotiations and the declaratory plaintiff did not deny liability
until it filed the declaratory action).
Relying upon Sherwin-Williams Co., Indemnity contends that its filing in this Court was not
forum-shopping, but rather was merely the exercise of its congressionally accorded right (via the
diversity statute) to the benefits and safeguards of a federal forum for an out-of-state citizen to
protect against the prejudices of local courts and local juries.2 This, however, ignores the actions
The Lucky Lounge Defendants contend that this argument overlooks the requirement that
“[a]ll plaintiffs must be diverse in citizenship from all defendants in an action brought under the
jurisdiction conferred by 28 U.S.C. § 1332(a).” Farrell Const. Co. v. Jefferson Parish, La ., 896
F.2d 136, 139-140 (5th Cir. 1990). They point out that Cox is a defendant in the state court case,
and there is thus not complete diversity in that case, rendering removal of the state court petition, via
Indemnity took to mislead Lucky Lounge, and to lure it into believing that there was no reason for
Lucky Lounge to file its own suit. Considering all of the facts, the Court finds that the second, third
and fourth factors collectively weigh in favor of dismissal. From the standpoint of fairness, the
evidence before the Court shows that Indemnity lulled the Lucky Lounge Defendants into
complacency by offering to pay defense costs, and then filed suit in federal court asking for a
declaration they had no duty to defend. Mission Ins. Co. v. Puritan Fashions Corp., 706 F.2d 599,
602 (5th Cir. 1983). At a minimum, Indemnity engaged in gamesmanship in order to secure the
federal forum. “Declaratory judgments are not to be used defensively to deny a prospective
plaintiff’s choice of forums.” Prudential Ins. Co. v. Doe, 140 F.3d 785, 790 (8th Cir. 1998).
With regard to the fifth factor, the record does not reflect that the federal forum is either more
or less convenient for either of the parties. From a geographic perspective of convenience, there is
little difference between the two courts, as they are three blocks away from each other. Indeed, I can
see the state courthouse out my window as I write these words. And from the standpoint of applying
the relevant law, it is notable that the declaratory judgment action does not present any federal law
questions. Interpretation of an insurance contract is a matter of state law, making this case
particularly well-suited for resolution by the state court. See Magnolia Marine Transport Co., Inc.
v. Laplace Towing Corp., 964 F.2d 1571, 1582 (5th Cir. 1992) (finding that the district court abused
its discretion by choosing not to stay or dismiss a declaratory judgment action when the action
involved state law interpretation of an insurance policy and there was a pending state court action
diversity, unavailable. In effect, they are contending that the suit filed in federal court lacks a
necessary party (Cox), and that “to allow the federal declaratory judgment action to go forward
would impermissibly ‘sanction partial removal in all but name.’” Sherwin Williams Co., 343 F.3d
at 397 n.7(citing Continental Cas. Co. v. Robsac Industries, 947 F.2d 1367, 1373 (9th Cir. 1991)).
The problem with this argument is that it is far from obvious that Cox is a necessary, or even proper,
party to the coverage dispute between Lucky Lounge and Indemnity. If Cox is a proper party, then
the Lucky Lounge Defendants may have a valid point, but if not, then their argument fails.
involving the same issue and parties). See also Sherwin–Williams, 343 F.3d at 396 (explaining that,
although the presence of a federal question is not specifically identified as one of the seven Trejo
factors, the existence of a federal question weighs in favor of a federal court exercising its discretion
to decide a declaratory judgment action).
The sixth factor, whether retaining the lawsuit in federal court would serve the purposes of
judicial economy, also favors dismissal. All of the issues presented in this case can be resolved in
the state court action. It would be wasteful to simultaneously litigate the same issues in two different
courts. Additionally, to allow parallel proceedings in two courts under these circumstances would
invite inconsistent policy interpretations and piecemeal litigation.
Considering these factors,3 the Court finds that dismissal of this case in favor of the state
court action is proper. There is a close nexus between the underlying factual and legal issues and
state law and public policy. This is particularly so in an insurance coverage case. See Scottsdale Ins.
Co. v. Flowers, 513 F.3d 546, 561 (6th Cir. 2008). “District courts routinely invoke the doctrine of
abstention in insurance coverage actions, which necessarily turn on issues of state law.” Travelers
Indem. Co. v. Philips Elecs. N. Am. Corp., 2004 WL 193564 *2 (S.D.N.Y. Feb. 3, 2004).
For all of these reasons, the undersigned Magistrate Judge RECOMMENDS that the District
Court GRANT Defendants’ Motion to Dismiss, or in the Alternative, Motion to Stay (Clerk’s Doc.
No. 5) and DISMISS Plaintiff’s Declaratory Judgment action WITHOUT PREJUDICE.
The seventh Trejo factor is inapplicable.
The parties may file objections to this Report and Recommendation. A party filing
objections must specifically identify those findings or recommendations to which objections are
being made. The District Court need not consider frivolous, conclusive, or general objections. See
Battle v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
A party's failure to file written objections to the proposed findings and recommendations
contained in this Report within fourteen (14) days after the party is served with a copy of the Report
shall bar that party from de novo review by the District Court of the proposed findings and
recommendations in the Report and, except upon grounds of plain error, shall bar the party from
appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the
District Court. See 28 U.S.C. § 636(b)(1)(c); Thomas v. Arn, 474 U.S. 140, 150-53, 106 S. Ct. 466,
472-74 (1985); Douglass v. United Servs. Auto. Ass’n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en
To the extent that a party has not been served by the Clerk with this Report &
Recommendation electronically pursuant to the CM/ECF procedures of this District, the Clerk is
directed to mail such party a copy of this Report and Recommendation by certified mail, return
SIGNED this 17th day of November, 2011.
ANDREW W. AUSTIN
UNITED STATES MAGISTRATE JUDGE
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