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Countrywide Home Loans v. Mortgage

June 15, 2011

COUNTRYWIDE HOME LOANS, INC.; PLAINTIFFS-APPELLEES., BAC HOME LOANS SERVICING,LP,
v.
MORTGAGE GUARANTY INSURANCE CORPORATION, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of California Jeffrey S. White, District Judge, Presiding D.C. No. 3:10-cv-00233-JSW

The opinion of the court was delivered by: Judge B. Fletcher

FOR PUBLICATION

OPINION

Argued and Submitted May 13, 2011 San Francisco, California

Before: Betty B. Fletcher and Sidney R. Thomas, Circuit Judges, and Lee H. Rosenthal, District Judge.*fn1

Opinion by Judge B. Fletcher

B. FLETCHER, Circuit Judge

OPINION

Appellant Mortgage Guaranty Insurance Company ("MGIC") appeals the district court's decision to remand this suit back to state court pursuant to its discretion under the Declaratory Judgment Act, 28 U.S.C. §§ 2201-2202 ("DJA"). MGIC argues that the district court was required to consider its motion under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. ("FAA"), before exercising its discretion under the DJA. We agree. We have jurisdiction under 28 U.S.C. § 1291, and we reverse and remand.

I. Appellant MGIC and Appellees Countrywide Home Loans Insurance Company and BAC Home Loans Servicing, LP (collectively "Countrywide") are parties to an insurance agreement referred to as the "Flow Policy." Under the terms of the Flow Policy, MGIC insures Countrywide against borrower defaults on Countrywide mortgage loans. The Flow Policy allows MGIC to cancel or to rescind coverage for loans involving material misrepresentations. The Flow Policy also provides for a reduction in the claimed loss amount in certain cases of "fraud, misrepresentation, or negligence" on the part of Countrywide. On the purported basis of these fraud provisions, MGIC rescinded or denied coverage on several Countrywide claims submitted between 2006 and 2008.

In addition, the Flow Policy contains an arbitration clause, which states that all controversies, disputes, or other assertions of liability or rights arising out of or relating to this Policy, including the breach, interpretation or construction thereof, shall be settled by arbitration. Notwithstanding the foregoing, [MGIC] or [Countrywide] both retain the right to seek a declaratory judgment from a court of competent jurisdiction on matters of interpretation of the [Flow] Policy.

On December 17, 2009, Countrywide filed a declaratory judgment action in California Superior Court contesting MGIC's denial of its claims. In its Complaint, Countrywide states that it seeks "declaratory relief . . . so that the [Flow Policy] language can be properly interpreted." On January 19, 2010, MGIC timely removed the action under 28 U.S.C. § 1441(b) to the United States District Court for the Northern District of California. The parties do not dispute that, pursuant to 28 U.S.C. § 1332, the district court had diversity jurisdiction over the suit. MGIC is a Wisconsin corporation with its principal place of business in Wisconsin; Countrywide Home Loans, Inc. is a New York corporation with its principal place of business in California; and BAC Home Loans Servicing is a Texas limited partnership with its principal place of business in Texas. The amount in controversy among the parties is greater than $75,000. Accordingly, this case was properly removed. See 28 U.S.C. § 1332; id. § 1441(b).

Countrywide then moved to remand, arguing that the court should "exercise its broad discretion under the [DJA]" and "decline jurisdiction and remand the case to state court." MGIC opposed the remand and filed a Motion to Stay the Action Pending Resolution through Arbitration under § 3 of the FAA. MGIC also filed an arbitration demand against Countrywide before the American Arbitration Association, seeking "resolution of the over 1400 loans in dispute between the parties."

On March 30, 2010, the district court granted Country-wide's motion to remand and denied without prejudice to refiling in state court MGIC's motion to stay pending arbitration. The District Court reasoned that the DJA "grants courts discretionary jurisdiction to declare the rights of litigants," and that "several factors weigh in favor of abstention." The court noted that the FAA provides no independent basis for federal jurisdiction, and that the power to enforce an arbitration clause only exists "when federal jurisdiction ...


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