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COMMERCIAL CASUALTY INSURANCE COMPANY OF GA. v. KINANN

United States District Court, Northern District of California


June 4, 2003

COMMERCIAL CASUALTY INSURANCE COMPANY OF GEORGIA, DBA ENVIRONMENTAL AND CASUALTY INSURANCE COMPANY, PLAINTIFF,
v.
ROBERT KINANN, ET AL., DEFENDANTS.

The opinion of the court was delivered by: Charles R. Breyer, United States District Judge

MEMORANDUM AND ORDER

This declaratory judgment action arises out of a policy insuring a general contractor. Defendants now move the Court to decline to exercise its jurisdiction over the declaratory judgment action or, in the alternative, dismiss those defendants as to whom there is no case controversy. After carefully considering the papers filed by the parties, and having had the benefit of oral argument, the Court declines to exercise its jurisdiction and dismisses this action without prejudice.

BACKGROUND

In July 2000 a married couple, the Browns, entered into a contract with Kinnan Associates Contracting, Inc. ("Kinnan Inc.") to construct a new home in San Anselmo. According to the Browns' state court complaint, Kinnan Inc. then subcontracted the entire j to another person. Kinnan Inc. subsequently fired the subcontractor for various reasons. Shortly thereafter, in October 2001, the Browns' almost-completed home was destroyed by fire.

In May 2001, before the fire, defendant Robert Kinnan obtained a general liability insurance policy from plaintiff through Marcillac Insurance Agency. After the fire, and after the Browns made a demand upon Kinnan, Kinnan tendered the demand to plaintiff insurer. January 2002, the insurer denied coverage on the ground that the construction contract was between the Browns and Kinnan & Associates, Inc., a corporation, whereas the insurance policy only insured Robert Kinnan d/b/a Kinnan & Associates, a sole proprietorship. The insurer also rescinded the policy on the ground of a material misrepresentation: namely, that his application Kinnan had represented that he was a remodeler doing jobs averaging $15,000 and that he had not disclosed that he engaged in new construction.

In April 2002, the Browns sued various Kinnan entities in Marin County Superior COL for damage they suffered as a result of the fire. The defense of the complaint was tendered to plaintiff which again denied coverage.

On December 11, 2002, plaintiff filed this action for declaratory relief, breach of warranty, and rescission. Plaintiff seeks rescission of the insurance contract on the ground Robert Kinnan made a material representation. The breach of warranty claim arises from the same allegation. Plaintiff also seeks a judicial declaration that it has no duty to defend or indemnify the Brown lawsuit and, in particular, that it has no duty to defend defendants "for their alleged wrongs to others, punitive damage claims, claims of fraud and misrepresentation poor workmanship, financial loss unrelated to an occurrence or accident, and other matters the do not come within the insuring agreement of the policy or are specifically excluded from coverage." Complaint ¶ 18. Plaintiff names as defendants Robert Kinnan, Kinnan, Inc., Bay Area Contractor Referral, Inc. ("BACR"), Pamela Kinnan, Robert Shedrick Kinann, and the Browns.

Five days after plaintiff filed this action, Robert Kinnan, his wife, and Kinnan, Inc. filed lawsuit in Marin County Superior Court against plaintiff and the insurance broker. There is also pending in Marin Superior Court an action by Kinnan against the subcontractor arising from the Browns' ill-fated construction project.

THE PENDING MOTION

The Kinnan defendants move for a discretionary dismissal of this action on the ground that the Court should defer to their pending state court action which raises the same issues. In the alternative they contend that there is no case or controversy with respect to certain defendants.

DISCUSSION

A lawsuit seeking federal declaratory relief must present an actual case or controversy within the meaning of Article III. It must also fulfill statutory jurisdictional prerequisites. Even if a lawsuit fulfills both of those prerequisites, the district court must also be satisfied that entertaining the action is appropriate. See G.E.I.C.O. v. Dizol, 133 F.3d 1220, 1222-23 (9th Cir. 1998) (en banc). This last determination is discretionary. Id.

The Court has diversity jurisdiction of this lawsuit. Defendants argue that there is no case or controversy with respect to some defendants, and as to those that there is a sufficient controversy, entertaining this lawsuit is not appropriate.

A. Defendants BACR, Robert Shedrick Kinnan, and the Browns

Defendants BACR and Robert Shedrick Kinnan move to dismiss the claims against t on the ground that there is no case or controversy. "The basic inquiry is whether the `conflicting contentions of the parties . . . present a real, substantial controversy between parties having adverse legal interests, a dispute definite and concrete, not hypothetical or abstract." Babbitt v. United Farm Workers Nat'l Union, 442 U.S. 289, 298 (1979) (citations omitted). There is no dispute between plaintiff and these defendants. None of these defendants, including the Browns, is a party to the insurance contract in dispute. None of the defendants has made a demand upon plaintiff. That these defendants are parties to the Brown lawsuit does not create a controversy between them and plaintiff. Accordingly, the Court lacks jurisdiction of plaintiff's claims against these defendants.

B. Defendants Robert Kinnan, his wife, Kinnan & Associates Contracting, and Kinnan, Inc. ("the Kinnan defendants")
Plaintiff has refused to defend and indemnify the Kinnan defendants in connection with the Browns' demands, and has also rescinded the policy; thus, there is a sufficient case or controversy to confer Article III jurisdiction. See American National Fire Insurance Co. v. Hungerford, 53 F.3d 1012, 1015-16 (9th Cir. 1995) ("[A] dispute between an insurer and its insured over the duties to defend and indemnify satisfies this requirement for purposes of the Declaratory Judgment Act."). The question, then, is whether the Court should nonetheless decline to exercise its discretion to hear plaintiffs claim for declaratory relief.

The Court's discretion not to hear a declaratory relief case is "not unfettered." Dizol, 133 F.3d at 1223. "[A] District Court cannot decline to entertain such an action as a matter whim or personal disinclination." Id. However "[i]f there are parallel state proceedings involving the same issues and parties pending at the time the federal declaratory action is file there is a presumption that the entire suit should be heard in state court." Id. at 1225. "The pendency of a state court action does not, of itself, require a district court to refuse federal declaratory relief. Nonetheless, federal courts should generally decline to entertain reactive declaratory actions." Id.

1. The pending action of Kinnan v. insurer and broker

The Kinnan defendants argue that the Court should decline to hear this case because the pendency of their own state court action filed five days after this case. They correctly argue that their case raises the exact same issues (as well as others) and therefore the Court should defer to the state court proceedings. The problem with this argument is that defendant filed their lawsuit after this lawsuit was filed and after they had been notified (although not served) of this lawsuit. Dizol held that there is a presumption that the entire suit should be heard in state court if the state court action is pending at the time the federal action is filed. 133 F.3d at 1223. Indeed, the case upon which defendants rely, American National Fire Ins. Hungerford, 53 F.3d 1012, 1016 (9th Cir. 1995), involved a parallel state court proceeding that was pending at the time the federal action was filed. To dismiss this case on the ground that the Kinnan defendants filed a state court action would give declaratory judgment defendants the power to keep diversity cases out of federal court by simply filing their own state court action whenever a federal action is filed.

Defendants also argue that maintaining this lawsuit will result in duplicative litigation They note that they have sued their insurance broker for negligence in his procurement of general liability insurance and also for having misrepresented the scope of the insurance coverage. Their state court complaint also alleges that after the insurer refunded defendants premium (following the rescission) the broker cashed the refund and attempted to return it to defendants. Based on these allegations, they claim the broker is an indispensable party to this litigation but he cannot be sued because his presence would destroy diversity.

The broker, however, has no rights at issue in this lawsuit. He is not a party to the insurance contract. Moreover, defendants' claims against the broker only arise when and if defendants lose this lawsuit; that is, if the Court concludes that the policy was properly rescinded and/or that coverage was otherwise properly denied. Defendants do not contend to plaintiff s rescission of the insurance contract was improper if a misrepresentation on the application was made by the broker rather than defendants; indeed, at oral argument defendant asserted that the insurance agreement expressly provides that the insurer may rescind the agreement even if the broker is responsible. Thus, while the broker is interested in the outcome of this lawsuit, and will probably be a witness, his presence as a party is not necessary in order for the Court to grant complete relief.

2. The underlying lawsuit, Brown v. Kinnan

While defendants' lawsuit was not pending at the time plaintiff filed this declaratory relief action, the Browns' lawsuit — which triggered this action — was pending. In American National Fire Ins. Co. v. Hungerford, 53 F.3d 1012 (9th Cir. 1995), an insurance company brought an action for declaratory relief in federal court seeking a declaration of non-coverage in a case currently pending against its insured in state court ("the state court action"). Id. at 1014. The Ninth Circuit noted that the insurer was not a party to the state court action, and the federal declaratory relief action presented different legal issues than those in the state court action. The court nonetheless held "that when an ongoing state proceeding involves a state law issue that is predicated on the same factual transaction or occurrence involved in a matter pending before a federal court, the state court is the more suitable forum" for the insurer to bring a related claim. Id. at 1017. The court's holding was based on several concerns. First, since the coverage decision depended, in part, on the facts developed in the state court action, hearing the case in federal court "would simply result in waste of federal resources at every level of the decision making process." Id. at 1018. Second, since the state (California) offered the same remedy, that is, a declaratory judgment remedy, to exercise jurisdiction of the federal action "would only be encouraging forum shopping." Id. Finally declining to exercise jurisdiction of the purely state law issues was in the interest of comity. Id.

Hungerford was overruled in part by the Ninth Circuit in Dizol. The court held that a district court need not sua sponte determine whether it should exercise jurisdiction of a declaratory judgment action. 133 F.3d at 1227. The court also explained that the "pendency a state court action does not, of itself, require a district court to refuse federal declaratory relief." Id. at 1225. It reaffirmed, however, that "federal courts should generally decline to entertain reactive declaratory actions," that is, actions filed in response to pending state court actions. Id.

Plaintiff filed this action in response to the Browns' action. Among other things, it seeks a declaration that the insurance policy does not provide coverage for the claims made by the Browns against the Kinnan defendants. Complaint ¶ 18. It seeks a declaration that the Browns' claims for intentional acts by defendants, punitive damages, fraud and misrepresentation, poor workmanship, and financial loss unrelated to the fire are excluded from coverage under the policy. Id.; see also Complaint Prayer at p. 7 (seeking a declaration that "some or all of the complained of in the [Brown] matter are excluded from coverage under the terms of the insurance policies."). As in Hungerford, this claim for declaratory relief is predicated on the same factual transaction involved in the Browns' state court proceeding. The resolution of this issue turns on the allegations of the Browns' complaint (with respect to the duty to defend) and the ultimate resolution of this lawsuit (with respect to the duty to indemnify). This is precisely the situation that the Ninth Circuit has counseled is more suitable for a state court to address. See Dizol, 133 F.3d at 1225; Hungerford, 53 F.3d at 1017.

At oral argument plaintiff argued that its lawsuit is really about Kinnan's misrepresentation on his insurance application rather than whether there is coverage for the Browns' lawsuit under the terms of the policy. That issue, plaintiff contends, is not predicate on the factual transaction at issue in the Browns' lawsuit.

The Court considered whether it should simply dismiss the non-coverage declaratory relief claim and exercise its jurisdiction of the misrepresentation declaratory relief claim. If concludes, however, that in the circumstances of this case it is not appropriate to exercise its jurisdiction of this claim.

First, dismissal of the non-coverage claim would simply increase the proliferation of lawsuits arising out of the Browns' fire. There are currently three related actions pending in the state court. Dismissal of the non-coverage claim would result in their possibly being a fourth state court action and a fifth action in federal court.

Second, plaintiff itself has emphasized how important it is to have all the parties to the various fire-related lawsuits in the same forum. Plaintiff named the Browns and other non-insureds as defendants in this lawsuit precisely because they are parties to the Browns' lawsuits. It reasoned that having all of these parties in one forum would facilitate settlement. See Opposition at 7. It also explained that the non-Kinnan defendants were needed because the Browns' allege they are alter egos of the Kinnan defendants; in other words, this lawsuit is related to and in some sense predicated on the Browns' lawsuit. Because of constitutional constraints, all of the parties that plaintiff deems relevant cannot be parties to this lawsuit. However, all of these parties, including plaintiff, can participate in the state court proceeding.

Third, while the Court has concluded that the broker is not a necessary or indispensable party to plaintiff's misrepresentation declaratory relief claim, it makes sense to have the same jury that determines whether Kinnan and/or his broker made a material misrepresentation decide Kinnan's claim against his broker from that misrepresentation, if any.

In sum, under the totality of the circumstances, and in light of the pendency of the Browns' state court lawsuit as well as the other related state-court proceedings, the Court concludes that it is not appropriate to exercise its jurisdiction of plaintiffs declaratory relief action.

Finally, although not raised by plaintiff, the Court notes that the Ninth Circuit has directed that "when other claims are joined with an action for declaratory relief . . . the district court should not, as a general rule, remand or decline to exercise jurisdiction." Dizol, 133 F.3d at 1225. Plaintiff's complaint purports to make a claim for rescission and a claim for breach of warranty in addition to its claim for declaratory relief. A close examination of the complaint, however, reveals that it is solely a complaint for declaratory relief. Plaintiff alleges that it has already rescinded the policy; it does not contend that the policy is currently in effect and that the Court should order it rescinded. See Complaint at ¶ 13 (stating that plaintiff instructed its California broker to notify "the insured that the policy was rescinded") Plaintiff in effect seeks a declaration that the rescission was proper. The only remedy plaintiff seeks with respect to its breach of warranty claim is a declaration that Kinnan's misrepresentations relieve plaintiff of its duties under the policy. See Complaint at p. 7. Accordingly, the Court construes the complaint as seeking only declaratory relief.

CONCLUSION

For the foregoing reasons, it is not appropriate for the Court to decide plaintiff's state law claims for declaratory relief. Accordingly, this action is DISMISSED without prejudice

IT IS SO ORDERED.

20030604

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