United Nat'l Ins. Co. v. R&D Latex Corp.

• Citation: 242 F.3d 1102
• Decision Date: 15 March 2001
• Docket Number: No. 99-55259,MORISON-KNOX and MICHAEL,99-55966,99-56078,99-55259
• Parties: (9th Cir. 2001) UNITED NATIONAL INSURANCE COMPANY, a Pennsylvania corporation, Plaintiff, and TRAVELERS CASUALTY AND SURETY COMPANY, formerly known as AETNA CASUALTY AND SURETY COMPANY, Plaintiff-Appellant, v. R&D LATEX CORPORATION, a Georgia corporation; ROYALTY CARPET MILLS, INC., a California corporation, Defendants, and MYDRIN, INC., for itself and as successor in interest to R&D Latex Corp., Defendant-Appellee. MYDRIN, INC., for itself and as successor in interest to R&D Latex Corp., Plaintiff-Counter Defendant-Appellee, v. TRAVELERS CASUALTY AND SURETY COMPANY, formerly known as AETNA CASUALTY AND SURETY COMPANY, Defendant-Counter-Claimant-Appellant, and WILLIAM C.D. PROUGH, Appellants
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1102

242 F.3d 1102 (9th Cir. 2001)

UNITED NATIONAL INSURANCE COMPANY, a Pennsylvania corporation, Plaintiff and TRAVELERS CASUALTY AND SURETY COMPANY, formerly known as AETNA CASUALTY AND SURETY COMPANY, Plaintiff-Appellant, v. R&D LATEX CORPORATION, a Georgia corporation; ROYALTY CARPET MILLS, INC., a California corporation, Defendants and MYDRIN, INC., for itself and as successor in interest to R&D Latex Corp., Defendant-Appellee.

MYDRIN, INC., for itself and as successor in interest to R&D Latex Corp., Plaintiff-Counter Defendant-Appellee, v. TRAVELERS CASUALTY AND SURETY COMPANY, formerly known as AETNA CASUALTY AND SURETY COMPANY, Defendant-Counter-Claimant-Appellant and WILLIAM C. MORISON-KNOX and MICHAEL D. PROUGH, Appellants.

No. 99-55259, 99-55966, 99-56078

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted August 9, 2000

Filed March 15, 2001

[Copyrighted Material Omitted]

Michael D. Prough, Morison-Knox Holden Melendez & Prough, LLP, Walnut Creek, California, for the appellants.

John D. Shaeffer and Christine Pagac, O'Donnell & Shaeffer, Los Angeles, California, for the appellee.

Appeal from the United States District Court for the Central District of California Lourdes G. Baird, District Judge, Presiding. D.C. No. CV-94-04140-LGB D.C. No.CV-99-303 LGB

Before: John T. Noonan, Stephen S. Trott and Marsha S. Berzon, Circuit Judges.

BERZON, Circuit Judge:

These three appeals are the latest round in a seemingly never-ending bout of litigation between Mydrin, Inc., and Travelers Casualty and Surety Company (formerly, Aetna Casualty and Surety Company), one of Mydrin's insurers. All three appeals stem from a dispute over Travelers' coverage of Mydrin for losses resulting from state-court lawsuits filed against Mydrin by two of its customers.

Travelers brings two appeals. The first is from an order of the district court declining to exercise its discretionary jurisdiction under the Declaratory Judgment Act, 28 U.S.C. S 2201(a), over a declaratory relief complaint filed by Travelers against Mydrin in federal district court (the"1994 action"). The second is from the district court's order declining jurisdiction and remanding a separate declaratory relief action subsequently brought in state court by Mydrin against Travelers and removed to the district court by Travelers (the "removed action"). Finally, two of Travelers' attorneys appeal the district court's imposition of Rule 11 sanctions upon them for their conduct in removing Mydrin's state-court action.

We dismiss the first appeal for lack of jurisdiction, reverse and remand in the second, and reverse in the third. Because we reject the district court's order declining jurisdiction over the removed action, the protracted jurisdictional squabbles in this litigation are finally at an end, and the district court may proceed to determine the merits of the coverage dispute.

I. Background

The background of this insurance-coverage litigation is well laid out in this court's decision, United National Insurance Co. v. R & D Latex Corp., 141 F.3d 916 (9th Cir. 1998) [hereinafter "R&D Latex"]. We draw largely from that opinion in this section. Because after years of litigation jurisdiction is still the principal issue in dispute, there are few facts but a great deal of procedural history to relate.

A. The Underlying Litigation

Mydrin, Inc., and its predecessor in interest, R & D Latex Corporation, manufactured and sold glue for use in tufted carpeting. Two carpet makers, Royalty Carpet Mills ("Royalty") and Western Dyeing and Finishing Corporation ("Western"), brought separate actions against Mydrin in Los Angeles Superior Court alleging that Mydrin's product was defective. The complaints asserted claims for, inter alia, breach of contract and breach of express and implied warranties. The Western action was settled by the parties in early 1998, but, at least as of the time of oral argument, the Royalty suit was still pending.

Travelers, one of Mydrin's several insurers,¹ initially agreed to defend Mydrin, but reserved the right to be reimbursed for the costs of doing so should it later be determined that insurance coverage was not available. Travelers claims to have spent over $300,000 defending Mydrin in the underlying cases before cutting off financial support in 1994.

B. Travelers' 1994 Action

In October 1994, Travelers brought suit against Mydrin, Royalty, and Western in the Central District of California seeking two remedies: (1) a declaratory judgment that Travelers had no duty to defend and/or indemnify Mydrin in either the Royalty or Western action; and (2) a reimbursement of defense costs already advanced in the two cases. Travelers' suit, along with similar ones brought by two of Mydrin's other insurers (United National Insurance Company and Birmingham Fire Insurance),² was assigned to Judge Real.

The district court granted summary judgment in favor of United, and several weeks later also granted partial summary judgment in favor of Travelers on its claim for declaratory relief regarding its duties to defend and to indemnify Mydrin in the Royalty action. Because Travelers also raised claims for declaratory relief relating to the Western action and sought reimbursement of defense costs in both cases, the decisions granting the two summary judgment motions did not constitute a final disposition of the consolidated cases. Travelers and Mydrin remedied this lack of finality by entering into a stipulation that, because the coverage issues related to the Western action were virtually identical to those of the Royalty action, the Royalty order was "deemed to adjudicate" the Western action as well. As part of that same stipulation, Travelers "dismiss[ed] without prejudice its . . . claim for relief for reimbursement of defense costs."

Once the stipulation had been implemented by the district court, Mydrin appealed, arguing inter alia that the district court erred in exercising its discretionary jurisdiction under the Declaratory Judgment Act over the consolidated cases.³ This court vacated the judgment and remanded to the district court to consider the propriety of its exercise of discretionary jurisdiction. United Nat'l Ins. Co. v. Mydrin, Inc., No. 9555733, 1996 WL 436508, at *1 (9th Cir. Aug. 2, 1996).

On remand, the district court, over Mydrin's objection, summarily reaffirmed its earlier decision, after finding that jurisdiction was proper. The district court did not, however, state its reasons for asserting jurisdiction. When Mydrin appealed a second time, we again returned the case to the district court to consider the jurisdictional question, holding that the requirement that the district court articulate its rationale for exercising jurisdiction was the law of the case, and that thedistrict court was required to abide by it. Additionally, we held that even if it had jurisdiction, the court should not have granted summary judgment to United or Travelers because issues of material fact remained in the case. In remanding to the district court, we ordered the case reassigned to a new district judge, stating:

Judge Real has twice granted summary judgment to United National and [Travelers] and has failed to articulate his reasons for exercising discretionary jurisdiction. In light of the history of this litigation, we conclude that if this case were before him for a third time he would have substantial difficulty in putting his previously expressed views out of his mind.

R&D Latex, 141 F.3d at 919-20.

The case was reassigned to Judge Baird. In December 1998, the district court declined to exercise discretionary jurisdiction under the Declaratory Judgment Act, and therefore dismissed the 1994 action without prejudice. The court found the exercise of jurisdiction inappropriate for several reasons, principally because disposition of the controversy would have entailed needless determination of state law issues overlapping those raised in the underlying litigation.

Although the district court's dismissal of the case rested on a decision not to exercise discretionary jurisdiction, it also noted an unresolved question regarding subject matter jurisdiction. Travelers' complaint had not pled facts adequate to make out diversity jurisdiction, nor had it alleged the existence of federal question jurisdiction. Subject matter jurisdiction is a necessary predicate to the issuance of a declaratory judgment, so if subject matter jurisdiction over Travelers' action could not be established, the question whether to exercise discretionary jurisdiction would not arise. American Casualty Co. v. Krieger, 181 F.3d 1113, 1118 (9th Cir. 1999). For purposes of the dismissal order, the district court assumed that Travelers could properly plead diversity, and proceeded to dismiss the action on grounds of discretionary jurisdiction under the Declaratory Judgment Act.

Travelers filed a motion for reconsideration, attacking the basis for the dismissal and explaining, with attached evidentiary support, that the parties were in fact diverse. Shortly thereafter, Travelers filed a notice of appeal, stating in the notice that pursuant to Federal Rule of Appellate Procedure 4(a)(4)(C), the appeal was tolled pending the district court's resolution of Travelers' motion for reconsideration.

After full briefing on the issue, the district court denied reconsideration of its dismissal order. On the same day, it issued an order to show cause ("OSC") requesting that Travelers plead the principal places of business of the parties in order to demonstrate diversity.

Disappointed with the dismissal of its declaratory judgment action, Travelers responded to the OSC with what appears to be a bit of legal gamesmanship. It stated that it had "interpreted" the OSC "as providing leave (indeed requiring) Travelers to file an amended complaint," and submitted a complaint repleading the reimbursement claim it had dropped over three years earlier,...