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FEDERAL INSURANCE COMPANY v. SKYY SPIRITS

United States District Court, N.D. California


April 11, 2005.

FEDERAL INSURANCE COMPANY, Plaintiff,
v.
SKYY SPIRITS, LLC, Defendant.

The opinion of the court was delivered by: MARILYN PATEL, Chief Judge, District

MEMORANDUM AND ORDER Re: Defendant's Motion to Stay

Plaintiff Federal Insurance Company filed this action seeking declaratory judgment that it has no duty to defend or indemnify defendant Sky Spirits, LLC against claims arising from defendant's alleged participation in a scheme to market and distribute alcoholic beverages to underage consumers in the state of Ohio. Defendant now moves to stay this action pending the outcome of the litigation of the underlying claims against it in the United States District Court for the Northern District of Ohio. In the alternative, defendant seeks dismissal of this action in its entirety. Having considered the parties' arguments and for the reasons stated below, the court enters the following memorandum and order.

BACKGROUND

  Defendant Skyy, LLC is a subsidiary of the Campari Group that engages in the sale and marketing of alcoholic beverages. Plaintiff Federal Insurance Company provided defendant with commercial general liability, liquor liability, and excess umbrella liability insurance policies during the period from July 5, 2000 to February 1, 2004.*fn1 Subject to a number of limitations and exclusions, these policies collectively obligate plaintiff to defend and indemnify defendant against claims for bodily injury and property damage that arose during the policy period. See Pl.'s Compl., Exh. C, General Liability Policy at 6; Pl.'s Compl., Exh. C, Liquor Liability Policy at 4; Pl.'s Compl., Exh. E, Excess Umbrella Policy at 1-2.*fn2

  Of particular relevance here are the provisions of these policies that define the scope of coverage for liabilities arising out of the sale, distribution, or manufacture of alcoholic beverages. The general liability policy (and thus by implication the "excess" provisions of the excess umbrella policy)*fn3 excludes from coverage, inter alia, any "bodily injury or property damage for which any insured may be held liable by reason of . . . causing or contributing to the intoxication of any person [or] the furnishing of alcoholic beverages to a person under the legal drinking age." Pl.'s Compl., General Liability Policy, Exh. C at 11. A substantially identical exclusion is recited in an endorsement modifying the "umbrella" portion (Part B) of the excess umbrella policy. Pl.'s Compl., Exh. E, Liquor Liability Exclusion at 1.

  While these exclusions foreclose claims against the general liability and excess umbrella policies for liability related to the furnishing of alcoholic beverages, the liquor liability policy does, as its name implies, provide coverage for liabilities arising from the sale of alcohol. Specifically, the policy states:

Subject to the applicable Limits Of Insurance, [plaintiff] will pay damages the insured becomes legally obligated to pay by reason of liability imposed by law for bodily injury or property damage to which this insurance applies. Liability for such bodily injury or property damage must be imposed on the insured by reason of the selling, serving, or furnishing of any alcoholic beverage.
Pl.'s Compl., Exh. C, Liquor Liability Policy at 4. Once again, however, coverage under the liquor liability policy is subject to a number of limitations and exclusions. Among the exclusions is the "expected or intended injury" provision, which excludes from coverage any "bodily injury or property damage which results from an act that . . . is intended by the insured? or . . . can be expected from the standpoint of a reasonable person to cause bodily injury or property damage." Id. at 6.

  The instant action for declaratory judgment arises from a dispute regarding plaintiff's obligation under the aforementioned policies to defend and indemnify defendant against claims asserted in two class action lawsuits that were originally filed in the Court of Common Pleas of Cuyahoga County, Ohio: Eisenberg et al. v. Anheuser-Busch, Inc. et al., No. CV 04 529102, and Tully et al. v. Anheuser-Busch, Inc. et al., No. CV 04 532269. The substantially identical complaints in the two actions allege that defendant, along with other manufacturers and distributors of alcoholic beverages, engaged in a "long-running, sophisticated, and deceptive scheme . . . to market alcoholic beverages to children and other underage consumers." Pl.'s Compl., Exh. A (hereinafter "Eisenberg Compl.") ¶ 1; Pl.'s Compl., Exh. B (hereinafter "Tully Compl.") ¶ 1. Based on these allegations, the complaints assert a number of claims for relief under Ohio law, including causes of action for telecommunications fraud, unjust enrichment, negligence, civil conspiracy, and unfair and deceptive practices under the Ohio Consumer Sales Practices Act. The state court actions were subsequently removed to the United States District Court for the Northern District of Ohio, where they are now pending in the action designated as Eisenberg et al. v. Anheuser-Busch, Inc. et al., No. CV 04-1081 (hereinafter "the Ohio action"). Plaintiff has provided for the defense against these claims under a reservation of its rights under the liquor liability policy.

  On September 14, 2004, plaintiff filed the instant action seeking declaratory judgment that it has no duty to defend or indemnify defendant against any claims or liability arising from the Ohio action. In seeking such a declaration, plaintiff first contends that defendant's allegedly deliberate or reckless marketing of liquor to underage consumers is excluded from coverage under the policy. Alternatively, plaintiff asserts that the damages sought in the Ohio action are not "bodily injury" or "property damage" of the kind that falls within the scope of the policy's coverage.

  On February 7, 2005, defendant moved to stay proceedings in this court pending resolution of the underlying Ohio action. In the alternative, defendant urges the court to exercise its discretion to decline jurisdiction under the Declaratory Judgment Act, 28 U.S.C. § 2201, and dismiss the instant action in its entirety. The court considers the merits of these arguments in the following memorandum and order. LEGAL STANDARD

  Under the Declaratory Judgment Act, a district court "may declare the rights and other legal relations of any interested party seeking such declaration." 28 U.S.C. § 2201(a). The text of the 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). Consequently, "[i]n 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. These considerations include refraining from unnecessary determination of state law issues, discouraging litigants from forum shopping, and avoiding duplicative proceedings. Government Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1225 (9th Cir. 1998) (en banc).

  DISCUSSION

  I. Discretionary Jurisdiction Under the Declaratory Judgment Act

  The question presented by defendant's motion is whether the court should refrain from exercising jurisdiction over the instant declaratory judgment action out of deference to the related proceedings now pending before the United States District Court for the Northern District of Ohio. As plaintiff seeks only declaratory judgment, the decision to stay or dismiss this action is committed to the sound discretion of the court. Cf. Diozol, 133 F.3d at 1225-26 (distinguishing between purely declaratory judgment actions and actions seeking declaratory judgment along with other claims for relief and noting the reduced scope of discretion to refrain from exercising jurisdiction in the latter case).*fn4 In exercising this discretion, the court is guided by the considerations set forth in Brillhart v. Excess Insurance Co. of America, 316 U.S. 491 (1941): avoiding needless determination of state law issues, discouraging litigants from filing declaratory actions as a means of forum shopping, and avoiding duplicative litigation. See Diozol, 133 F.3d at 1225 (observing that these considerations "remain the philosophic touchstone for the district court"). While these "Brillhart factors" counsel restraint in the exercise of the court's authority to entertain declaratory judgment actions, the degree of restraint that a district court should exercise varies with the facts and circumstances of a particular case. Typically, courts will be most circumspect in exercising jurisdiction over a "defensive" declaratory judgment action that seeks to litigate issues identical to those that will be resolved in another proceeding. See, e.g., Continental Cas. Co. v. Robsac Indus., 947 F.2d 1367, 1372 (9th Cir. 1991), overruled on other grounds, Dizol, 133 F.3d at 1227. In light of the considerations identified by the Brillhart Court, the Ninth Circuit has observed that "federal courts should generally decline to entertain" these so-called "reactive declaratory actions." Dizol, 133 F.3d at 1225. This observation is particularly apposite where an insurer brings a declaratory judgment action against its insured during the pendency of a state court proceeding involving the same parties and the same issues, a scenario that the Ninth Circuit has characterized as "an archetype of what we have termed `reactive' litigation." Robsac, 947 F.2d at 1372 (citation omitted).

  However, more subtlety is required where a request for declaratory judgment implicates issues that arise in a related dispute to which the plaintiff in the declaratory judgment action is not a party. Not surprisingly, this situation also frequently arises in insurance litigation. The instant action is typical in that it involves an insurer seeking a declaration of its rights and liabilities with respect to a third-party tort claim that has been filed against its insured in another court. Unlike "reactive declaratory actions," such "coverage actions" typically involve different parties and issues than the underlying liability claim. See, e.g., Nationwide Ins. v. Zavalis, 52 F.3d 689, 693 (7th Cir. 1995) (observing that the issues raised in an insurer's coverage action are "fundamentally distinct" from the underlying tort claims). Id. at 693. Yet in spite of these differences in the parties and issues involved, the Ninth Circuit has taken a rather dim view of the propriety of granting declaratory relief under such circumstances. For example, in American National Fire Insurance Co. v. Hungerford, 53 F.3d 1012 (9th. Cir. 1995), overruled on other grounds, Dizol, 133 F.3d at 1227, an issuer of directors and officers liability insurance sought a declaration that it had no duty to indemnify the chief executive office ("CEO") of the insured corporation against potential liability arising from a breach of fiduciary duty action that was pending in a California court. Id. at 1014. In spite of the fact that the insurance company was not a party to the state court action (and could not be joined as a party under California law), the court concluded that the proper vehicle for resolving the parties' coverage dispute was a separate action in the same court that would decide the underlying tort action. Id. at 1017. Consequently, the court held that the district court abused its discretion in exercising jurisdiction over the insurer's declaratory relief claim. Id. at 1019.

  Of course, in this action, plaintiff seeks declaratory relief with respect to its duty to provide a defense in the underlying action as well as to its duty to indemnify defendant. This distinction is significant because in contrast to indemnification issues, the duty to provide a defense "is most often determined primarily, if not exclusively, from the face of the underlying complaint against the insured." Zavalis, 52 F.3d at 693-94 (citations omitted). For this reason, a number of courts have held that even though declaratory judgment on the issue of an insurer's duty to indemnify is premature while the underlying action is pending in another jurisdiction (typically a state court), a district court may nonetheless entertain a request for declaratory relief as to the insurer's duty to provide a defense in the underlying action. See, e.g., id.; Continental Cas. Co. v. Coastal Sav. Bank, 977 F.2d 734, 738 (2d Cir. 1992). However, the Ninth Circuit was unpersuaded by such considerations in Employers Reinsurance Corp. v. Karussos, 65 F.3d 796 (9th Cir. 1995), overruled on other grounds, Dizol, 133 F.3d at 1227. In that case, the court was presented with an appeal of a declaratory judgment action in which an insurer sought a declaration of its rights and liabilities with respect to both its duty to defend and its duty to indemnify the insured in a state court action by the insured's creditors. Id. at 798. In spite of the presence of the duty to defend issue, the court concluded that "the parties have pointed to no facts or circumstances which would make the exercise of federal court jurisdiction appropriate." Id. at 799. Thus, applying Hungerford, the court held that the district court erred in exercising jurisdiction over the insurer's claims. Id. at 800-01.

  From Karussos and Hungerford, it is possible to deduce a general rule governing the exercise of jurisdiction over an insurer's request for a declaration of its rights and liabilities with respect to third-party tort claims pending in another jurisdiction, under which the court where the underlying tort action is filed is presumptively the proper forum for adjudicating the declaratory judgment action so long as there is a procedural vehicle in that jurisdiction to resolve the insurer's claims. See Polido v. State Farm Mut. Auto. Ins. Co., 110 F.3d 1418, 1423 (9th Cir. 1997), overruled on other grounds, Dizol, 133 F.3d at 1227. Under Ninth Circuit law, such a presumption applies regardless of whether the insurer is a party to the underlying tort action and regardless of whether the coverage and tort actions raise the same issues. See id.; see also Karussos, 65 F.3d at 801 (observing that "Hungerford applies whether or not there is a similarity of issues").*fn5 Admittedly, the cases cited above address the more common situation where the underlying action against the insured is pending in state court, whereas here the tort claims underlying the instant request for declaratory relief have been removed to a federal court in another district. Nevertheless, both Hungerford and Karussos are quite clear that the propriety of declining jurisdiction in those case was premised on the fact that the insurer could have filed its declaratory judgment action as "a separate action [in] the same court that will decide the underlying tort action." Karussos, 65 F.3d at 800 (quoting Hungerford, 53 F.3d at 1016-17); see also Hungerford, 53 F.3d at 1016-17 (citing Allstate Ins. Co. v. Mercier, 913 F.2d 273, 278-79 (6th Cir. 1990)). That requirement is clearly satisfied here, given that the Northern District of Ohio would be a proper venue for the instant declaratory judgment action. See 28 U.S.C. § 1391(a)(2) (providing that a diversity action may brought in "a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred").

  Moreover, many of the factors that motivated the Karussos and Hungerford courts apply regardless of whether the underlying action is pending in state or federal court. Particularly apposite here are the Ninth Circuit's expressed desire to limit forum shopping, as well as its recognition that the interests of judicial economy are best served by resolving all claims related to the underlying tort action in the same forum. See Hungerford, 53 F.3d at 1017-19; see also Karussos, 65 F.3d at 798-99 (observing that the rule announced in Hungerford "serves a number of important policies such as avoiding rendering opinions based on purely hypothetical factual scenarios, discouraging forum shopping, encouraging parties to pursue the most appropriate remedy for their grievance, preserving precious judicial resources, and promoting comity") (citation and internal quotation marks omitted). Even more compelling in this case than in others where the underlying action is pending in the California state courts is that the underlying action involves Ohio statutory and common law, some of which may be unique.*fn6 Thus, adopting the reasoning of Karussos and Hungerford, the court concludes that the exercise of jurisdiction over plaintiff's declaratory judgment action is presumptively improper.

  It is true that the Ninth Circuit has recognized that this presumption can be overcome if the facts and circumstances of the insurer's claim distinguish it from the "general run of insurance coverage cases where the exercise of a district court's jurisdiction would be unwarranted." Karussos, 65 F.3d at 799. However, nothing in the record suggests that such circumstances are present here, and plaintiff's papers appear almost willful in their failure to identify any characteristics of the instant action that would distinguish it from an ordinary, run-of-the-mill insurance coverage dispute. In the absence of any such characteristics, the court must decline to entertain plaintiff's request for declaratory relief.

  II. Disposition

  Having concluded that it would be improper to exercise jurisdiction over plaintiff's request for declaratory relief at this time, the court must determine the appropriate disposition of the instant action. Upon determining that abstention under the doctrine of Colorado River Water Conservation Dist. v. United States, 426 U.S. 912 (1976), is warranted, a district court has discretion to stay or dismiss the action pending before it. See Holder v. Holder, 305 F.3d 854, 868 (9th Cir. 2002) (citation omitted). Here, the court notes that plaintiff's complaint raises nonfrivolous issues regarding its obligations to defend and indemnify defendant under its liquor liability policy. Thus, while it would likely be an abuse of discretion under the law of this Circuit to permit plaintiff to litigate such issues in this forum, the court finds that the interests of justice favor permitting plaintiff to refile the instant action in the Northern District of Ohio if it elects to do so. The court therefore concludes that the dismissal of plaintiff's complaint is proper. CONCLUSION

  For the foregoing reasons, the court GRANTS defendant's motion to dismiss and DENIES defendant's motion to stay. The instant action is hereby DISMISSED without prejudice to refiling in the United States District Court for the Northern District of Ohio. The clerk shall close the file.

  IT IS SO ORDERED.


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