United States District Court, S.D. California
ORDER GRANTING MOTION TO STAY
James Lorenz, United States District Judge
before the Court in this insurance action is a motion to stay
filed by Defendants and Cross-Defendants McAvoy Construction,
Inc. and Russell McAvoy (collectively "McAvoy").
Plaintiff/Counter-Defendant Capitol Specialty Insurance
Corporation ("Capitol") and
International Underwriters Limited ("AmTrust,"
collectively "Insurers") each filed an opposition.
McAvoy replied. For the reasons which follow, McAvoy's
motion to stay is granted.
2013, McAvoy was retained by the Ellen Joy Marks Trust
("Marks") as a general contractor on a custom
residential project located in San Diego. The project was to
pass final inspection and be substantially completed around
September 2014. Due to alleged faulty work, the final
inspection did not take place until November 2015. In March
2016, Ms. Marks moved into the residence although the project
was still not completed. In addition to prior defective work
which had not been remedied, after moving in, Ms. Marks
discovered new defects. She also found that major and minor
work remained to be done. On August 11, 2016, she sent a
notice of breach and a demand to cure to McAvoy. On November
14, 2016, she filed a construction defect lawsuit in state
court captioned Marks v. McAvoy Construction, Inc. et
al., San Diego County Superior Court case no.
37-2016-00039955-CU-BC-CTL, alleging breach of contract,
breach of the implied covenant of good faith and fair
dealing, building code violations, negligence and accounting
(the "Underlying Action"). She produced a 23-page
list of defects which she attributed to McAvoy and its
tendered the defense of the Underlying Action to its
Insurers. AmTrust had issued commercial general liability
policies to McAvoy with effective dates of June 30, 2014 to
June 30, 2016. Capitol had issued a commercial general
liability policy with effective dates of May 6, 2016 to May
6, 2017. Capitol agreed to defend McAvoy with a reservation
thereafter, Capitol filed the instant action against McAvoy
and AmTrust seeking a declaratory judgment of no duty to
defend and no duty to indemnify McAvoy, declaratory judgment
that AmTrust had a duty to defend, as well as equitable
contribution and indemnity from AmTrust. After this action
was filed, AmTrust agreed to defend McAvoy in the Underlying
Action and reimburse Capitol for an equitable share of the
defense costs, both with a reservation of rights. In this
action, AmTrust cross-claimed against McAvoy seeking a
declaratory judgment of no duty to defend and no duty to
indemnify and reimbursement of defense costs. AmTrust also
counterclaimed against Capitol seeking a declaratory judgment
of no duty to defend and no duty to indemnify as well as
equitable contribution. The Court has diversity jurisdiction
over all claims pursuant to 28 U.S.C. §1332.
filed the pending motion requesting the Court to stay this
action pending the resolution of the Underlying Action. The
motion is based primarily on the overlap in factual issues
and duplicative discovery. Both Insurers oppose. Although
they concede that liability and coverage actions always
entail a certain amount of factual overlap, they argue that
this action should not be stayed. At the very least, they
claim, they should be allowed to file summary judgment
motions on the duty to defend issues, which, according to
them, can be resolved completely separate and apart from the
Declaratory Judgment Act, 28 U.S.C. §2201, confers on
unique and substantial discretion in deciding whether to
declare the rights of litigants. On its face, the statute
provides that a court "may declare the rights
and other legal relations of any interested party seeking
such declaration” . . .. The statute's textual
commitment to discretion, and the breadth of leeway . . .
distinguish the declaratory judgment context from other areas
of the law in which concepts of discretion surface. [It is]
an enabling Act, which confers a discretion on the courts
rather than an absolute right upon the litigant.
Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995)
(emphasis in original, quoting 28 U.S.C. §2201(a); other
citations and internal quotation marks omitted).
"Consistent with the nonobligatory nature of the remedy,
a district court is authorized . . . to stay or dismiss an
action seeking declaratory judgment." Id. at
288. As requested here, a stay is often preferable to
dismissal "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. n.2. When parallel state court proceedings are
pending, "presenting an opportunity for ventilation of
the same state law issues," the district court may stay
the case in federal court to allow for completion of the
state court case. Id. at 290 (discussing
Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491
(1942)). "[F]ederal courts should generally decline to
entertain reactive declaratory actions." R.R. Street
& Co. Inc. v. Transport Ins. Co., 656 F.3d 966, 976
(9th Cir. 2011). Three factors first articulated
in Brillhart bear upon the decision whether to stay
(or dismiss) a declaratory relief action: avoiding needless
determination of state law issues; discouraging forum
shopping; and avoiding duplicative litigation. Id.
pending action presents insurance coverage and contribution
issues while the Underlying Action presents liability issues.
All claims are asserted under California law. Neither the
parties named, nor the legal claims alleged in the Underlying
Action and in this coverage action are identical. The
Insurers latch on to this and claim that at least the duty to
defend issues are independent of the issues raised in the
Underlying Action. In their opposition briefs both Insurers
point to their respective definitions of occurrence and
pre-existing occurrence exclusions, arguing that the timing
of the alleged damage is central to their duty to defend
claims while irrelevant to any claims raised in the
Insurers' opposition is based on an oversimplified view
of construction defect litigation, especially in light of the
23-page list of defects produced by Marks, which attributes
the defects not only to McAvoy but also to its numerous
subcontractors. It is beyond question that the Underlying
Action will entail litigation of each alleged defect. It
seems patently unnecessary to cover the same ground in this
action, even if, as Insurers contend, all they are interested
in in this action is the timing of each defect.
upon review of Capitol's complaint and AmTrust's
cross-claim, it is apparent that the Insurers intend to
litigate their duties to defend on additional grounds than
merely the timing of each occurrence, which grounds they
intend to present "based on the . . . evidence,
documents, testimony, expert reports, and other information
developed in the Underlying Action." (See,
e.g., doc. no. 1 at 10; see also Id. at 10-11;
doc. no. 8 at 11-12.) The actions are therefore intertwined
at the point of factual issues with direct bearing on the
declaratory relief claims presented in this Court.
“[t]he differences in factual and legal issues between
the state and federal court proceedings are not
dispositive.” Polido v. State Farm Mut. Auto Ins.
Co., 110 F.3d 1418, 1423 (9th Cir. 1997), overruled on
other grounds in Gov't Employees Ins. Co. v.
Dizol, 133 F.3d 1220 (9th Cir. 1998). This is
because the Insurers "could have presented the issues
[they] brought in federal court in a separate action to the
same court that will decide the underlying tort action."
Polido, 110 F.3d at 1423. The dispositive question
is "whether there was a procedural vehicle available to
the insurance company in state court to resolve the issues
raised in the action filed in federal court."
Id. The Insurers have presented no reason, and the
Court is aware of none, why they could not have raised the
same coverage issues in a declaratory relief action filed in
state court. The issues presented here could be
"ventilated" in the Underlying Action.
foregoing reasons, the Brillhart factors favor
staying this action pending the conclusion of the Underlying