Countrywide Home Loans Inc. v. Mortgage Guar. Ins. Corp..

• Decision Date: 15 June 2011
• Docket Number: No. 10–15996.,10–15996.
• Citation: 642 F.3d 849
• Parties: COUNTRYWIDE HOME LOANS, INC.; BAC Home Loans Servicing, LP, Plaintiffs–Appellees.,v.MORTGAGE GUARANTY INSURANCE CORPORATION, Defendant–Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

642 F.3d 849

11 Cal. Daily Op. Serv. 7304

2011 Daily Journal D.A.R. 8784

COUNTRYWIDE HOME LOANS, INC.; BAC Home Loans Servicing, LP, Plaintiffs–Appellees.,

v.MORTGAGE GUARANTY INSURANCE CORPORATION, Defendant–Appellant.

No. 10–15996.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 13, 2011.Filed June 15, 2011.

David E. Weiss, Raymond A. Cardozo, and Roxanne M. Garibay, Reed Smith LLP, San Francisco, CA; and David M. Halbreich, Reed Smith LLP, Los Angeles, CA, for the plaintiffs-appellees.Ellen Cirangle and Jonathan Sommer, Stein & Lubin LLP, San Francisco, CA; Joseph C. Smith, Jr., Bartlit Beck Herman Palenchar & Scott LLP, Denver, CO; and Jeffrey A. Hall, Andrew C. Baak, and Ashley C. Keller, Bartlit Beck Herman Palenchar & Scott LLP, Chicago, IL; for the 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.Before: BETTY B. FLETCHER and SIDNEY R. THOMAS, Circuit Judges, and LEE H. ROSENTHAL, District Judge.^*

OPINION

B. FLETCHER, Circuit Judge.

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 Countrywide'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 is otherwise established.” The court further reasoned that the arbitrability of the action was “more properly addressed in state court.”

On April 27, 2010, MGIC timely filed a notice of appeal of the district court's decision to remand without reaching the merits of its FAA motion. Because the district court's discretionary remand pursuant to the DJA constitutes an immediately appealable “final decision” under the collateral order doctrine, see Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 715, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996), we have jurisdiction under 28 U.S.C. § 1291. See Snodgrass v. Provident Life & Accident Ins. Co., 147 F.3d 1163, 1166 (9th Cir.1998).

II.

The question presented by MGIC's appeal is whether a district court's discretion under the DJA allows the court to decline to consider and to award relief under the FAA. This question is one of first impression in this circuit. MGIC argues that the discretion afforded under the DJA does not allow the district court to abstain from deciding a request for relief under the FAA. Countrywide's position is that the issue of arbitrability should not be excepted from a federal court's well-established DJA discretion to decline to hear an action seeking declaratory relief.

A.

We first examine the discretion granted to federal courts under the DJA. Generally, district courts have a “virtually unflagging obligation ... to hear jurisdictionally sufficient claims.” Snodgrass, 147 F.3d at 1167 (internal citations and quotation marks omitted). The DJA relaxes this obligation in cases where a party seeks declaratory relief. It provides that “any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 2201(a) (emphasis added).

Both the Supreme Court and this court have, at times, characterized the discretion provided under the DJA as the ability to “accept” or “decline” “discretionary” jurisdiction, or to decide whether to “exercise jurisdiction,” in an action seeking declaratory relief. See Brillhart v. Excess Ins. Co. of America, 316 U.S. 491, 494, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942) (“Although the District Court had jurisdiction of the suit under the [DJA], it was under no compulsion to exercise that jurisdiction.”); United Nat. Ins. Co. v. R & D Latex Corp., 242 F.3d 1102, 1112 (9th Cir.2001) (analyzing whether the court's “jurisdiction over actions with both declaratory and monetary claims remained discretionary” or whether the non-declaratory claims triggered “mandatory” jurisdiction); Gov't Emps. Ins. Co. v. Dizol, 133 F.3d 1220, 1227 (9th Cir.1998) (holding that, “[W]hen constitutional and statutory jurisdictional prerequisites to hear a case brought pursuant to the [DJA] have been satisfied, the district court may proceed with consideration of the action without sua sponte addressing whether jurisdiction should be declined.”); Snodgrass, 147 F.3d at 1166–67 (reviewing the “district court's decision to decline jurisdiction under the [DJA]”). Understandably, then, the district court's remand order invokes and relies upon this “discretionary jurisdiction” language.

As MGIC correctly points out, however, it is imprecise to describe the discretion provided by the DJA in terms of jurisdiction. A court's jurisdiction is distinct from its remedial powers. Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 90, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998). In passing the DJA, “Congress enlarged the range of remedies available in the federal courts but did not extend their jurisdiction.” Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671, 70 S.Ct. 876, 94 L.Ed. 1194 (1950); see also Wilton v. Seven Falls Co., 515 U.S. 277, 288, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995) (noting that “[b]y the Declaratory Judgment Act, Congress sought to place a remedial arrow in the district court's quiver” and that “[c]onsistent with the non-obligatory nature of the remedy, a district court is authorized, in the sound exercise of its discretion, to stay or to dismiss an action seeking a declaratory judgment” (emphasis added)). Therefore, while the DJA expanded the scope of the federal courts' remedial powers, it did nothing to alter the courts' jurisdiction, or the “right of entrance to federal courts.” Skelly Oil, 339 U.S. at 671, 70 S.Ct. 876. Put another way, the DJA gave district courts the discretion to provide a type of relief that was previously unavailable, but did not “impliedly repeal[ ] or modif[y]” the general conditions necessary for federal adjudication (e.g., a federal question or diversity of citizenship). Id. at 672, 70 S.Ct. 876.

The Seventh Circuit recently made clear this distinction. In Brandt v. Village of Winnetka, 612 F.3d 647 (7th Cir.2010), the court affirmed the district court's decision to dismiss a declaratory judgment action. The court explained, however, that the district court's dismissal “for lack of jurisdiction” was a “misstep,” because the exercise of discretion as to whether to issue a...