Dianoia's Eatery, LLC v. Motorists Mut. Ins. Co.

• Decision Date: 18 August 2021
• Docket Number: No. 20-2958, No. 20-3122,No. 20-2954,20-2954
• Citation: 10 F.4th 192
• Parties: DIANOIA'S EATERY, LLC, doing business as DiAnoia's and Pizzeria Davide v. MOTORISTS MUTUAL INSURANCE COMPANY, Appellant Umami Pittsburgh, LLC d/b/a Umami v. Motorists Commercial Mutual Insurance Company, Appellant Mark Daniel Hospitality LLC, doing business as INC v. AmGUARD Insurance Company, Appellant
• Court: U.S. Court of Appeals — Third Circuit

10 F.4th 192

DIANOIA'S EATERY, LLC, doing business as DiAnoia's and Pizzeria Davide

v.MOTORISTS MUTUAL INSURANCE COMPANY, Appellant

Umami Pittsburgh, LLC d/b/a Umami

v.Motorists Commercial Mutual Insurance Company, Appellant

Mark Daniel Hospitality LLC, doing business as INC

v.AmGUARD Insurance Company, Appellant

No. 20-2954

No. 20-2958

No. 20-3122

United States Court of Appeals, Third Circuit.

Argued April 28, 2021

Filed: August 18, 2021

Timothy A. Carroll, Clyde & Co US LLP, 2000 Campus Drive, Suite 300, Florham Park, NJ 07932, John R. Gerstein [ARGUED], Patrick F. Hofer, Clyde & Co US LLP, 1775 Pennsylvania Avenue NW, Suite 400, Washington, DC 20006, Robert E. Dapper, Jr., Matthew A. Meyers, Taylor M. Davis, Burns White, 48 26th Street, Burns White Center, Pittsburgh, PA 15222, Counsel for Appellants Motorists Mutual Insurance Company, Motorists Commercial Mutual Insurance Company

Daniel B. Feder [ARGUED], Bryce L. Friedman, Michael J. Garvey, Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, NY 10017, Susan M. Leming, Brown & Connery, LLP 360 Haddon Avenue, P.O. Box 539, Westmont, NJ 08108, Counsel for Appellant AmGUARD Insurance Company

Scott B. Cooper, Schmidt Kramer, P.C., 209 State Street, Harrisburg, PA 17101, John P. Goodrich, Jack Goodrich & Associates, PC, 429 Fourth Avenue, Suite 900, Pittsburgh, PA 15219, James C. Haggerty [ARGUED], Haggerty, Goldberg, Schleifer, & Kupersmith P.C., 1835 Market Street, Suite 2700, Philadelphia, PA 19103, Jonathan Shub, Shub Law Firm, LLC, 134 Kings Highway East, 2nd Floor, Haddonfield, NJ 08033, Counsel for Appellees DiAnoia's Eatery, LLC, Umami Pittsburgh, LLC

Ralph P. Ferrara [ARGUED], Kevin J. Kotch, Ferrara Law Group, P.C., 1 Holtec Drive, Suite G102, Marlton, NJ 07728, Counsel for Appellee Mark Daniel Hospitality LLC

Before: SMITH, Chief Judge, PHIPPS, and ROTH, Circuit Judges.

OPINION OF THE COURT

SMITH, Chief Judge.

The COVID-19 pandemic has had a devastating impact on the restaurant industry. Since at least March 2020, the risk of virus transmission has discouraged a significant number of customers from patronizing restaurants. And in response to the pandemic, state and local government officials have issued public health orders restricting how restaurants operate by, among other things, restricting their hours of operation, imposing strict occupancy limits, and even prohibiting in-person dining. Consequently, many restaurants have suffered a substantial decrease in business with resulting lost income.

The three Restaurants in these consolidated appeals each brought its own action in state court seeking a declaration that its respective Insurer was obligated to provide coverage for COVID-19-related losses under an insurance policy. Each Insurer removed its case to federal court invoking diversity jurisdiction. Then, each District Court exercised its discretion under the Declaratory Judgment Act ("DJA"), 28 U.S.C. §§ 2201 – 02, to abstain from hearing the case and ordered the matter be remanded to state court. It is these exercises of discretion under the DJA that lie at the heart of the three appeals.

We conclude that the District Courts erred in weighing factors relevant to the exercise of discretion under the DJA, and therefore will vacate the removal orders and remand for renewed consideration of all relevant factors.

I. LEGAL BACKGROUND

Generally, "federal courts have a strict duty to exercise the jurisdiction that is conferred upon them by Congress." Quackenbush v. Allstate Ins. Co. , 517 U.S. 706, 716, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996) ; see also Colo. River Water Conservation Dist. v. United States , 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976) (federal courts have "virtually unflagging obligation ... to exercise the jurisdiction given them"). Declaratory judgment actions implicate an exception to this rule. See Reifer v. Westport Ins. Corp. , 751 F.3d 129, 134–35 (3d Cir. 2014). The DJA provides that "[i]n a case of actual controversy within its jurisdiction, ... any court of the United States, ... 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). The Supreme Court has long held that the DJA's "textual commitment to discretion"—i.e. , "may"—"confer[s] ... unique and substantial discretion" upon district courts to decide whether to exercise jurisdiction in declaratory judgment actions. Wilton v. Seven Falls Co. , 515 U.S. 277, 286–87, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995) ; see also Reifer , 751 F.3d at 139. In other words, a district court may abstain from hearing a declaratory judgment action that is properly within the court's subject matter jurisdiction.

However, a district court's discretion under the DJA is not absolute. It is "bounded and reviewable." Reifer , 751 F.3d at 140 (citing Brillhart v. Excess Ins. Co. of Am. , 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942) ; Wilton , 515 U.S. 277, 115 S.Ct. 2137 ). Over the years, we have articulated several factors that district courts should consider when exercising discretion under the DJA. Id. In our most comprehensive discussion of these factors, Reifer , we began by noting that the "existence or non-existence of pending parallel state proceedings [to the declaratory judgment action]," while not dispositive, is a factor that "militates significantly" in favor of either declining or exercising jurisdiction, respectively. Id. at 144–45. We then enumerated eight factors that a district court should consider "to the extent they are relevant":

(1) the likelihood that a federal court declaration will resolve the uncertainty of obligation which gave rise to the controversy;

(2) the convenience of the parties;

(3) the public interest in settlement of the uncertainty of obligation;

(4) the availability and relative convenience of other remedies;

(5) a general policy of restraint when the same issues are pending in a state court; (6) avoidance of duplicative litigation;

(7) prevention of the use of the declaratory action as a method of procedural fencing or as a means to provide another forum in a race for res judicata; and

(8) (in the insurance context), an inherent conflict of interest between an insurer's duty to defend in a state court and its attempt to characterize that suit in federal court as falling within the scope of a policy exclusion.

Id. at 146.

The eight Reifer factors are not exhaustive. Id. We have also pointed to "additional guidance" from State Auto Insurance Cos. v. Summy , 234 F.3d 131 (3d Cir. 2000), as amended (Jan. 30, 2001), as applicable in the insurance context. Reifer , 751 F.3d at 146–47. Summy ’s additional guidance includes the recommendation that "when applicable state law is ‘uncertain or undetermined, district courts should be particularly reluctant’ to exercise DJA jurisdiction." Id. at 141 (quoting Summy , 234 F.3d at 135 ). Further, "[t]he fact that district courts are limited to predicting—rather than establishing—state law requires ‘serious consideration’ and is ‘especially important in insurance coverage cases.’ " Id. at 148 (quoting Summy , 234 F.3d at 135 ). Yet, we have cautioned that there can be no per se dismissal of insurance declaratory judgment actions, in part because "[f]ederal and state courts are equally capable of applying settled state law to a difficult set of facts." Id. at 147 (alteration in original) (quoting Heritage Farms Inc. v. Solebury Twp. , 671 F.2d 743, 747 (3d Cir. 1982) ).

In weighing these factors, "district courts declining jurisdiction should be rigorous in ensuring themselves that the lack of pending parallel state proceedings is outweighed by opposing factors." Id. at 144. With respect to state law claims, district courts should "squarely address" the alleged novelty or undetermined nature of state law issues. Id. at 149. Finally, "[t]he weighing of these factors should be articulated in a record sufficient to enable our abuse of discretion review." Id. at 147.

With that background, we turn to the cases before us.

II. PROCEDURAL HISTORY

These three appeals follow a pattern. Each Restaurant had purchased an insurance policy that provided coverage for commercial property. Each policy was an "all risks" policy—meaning it covered losses unless specifically excluded—and contained a virus exclusion. Each Restaurant filed a complaint, styled as a declaratory judgment action, in state court that sought a declaration that its Insurer was obligated to cover losses arising from the COVID-19 pandemic and the associated government orders (or, in one case, solely because of the government orders). Each Insurer removed the case to federal district court. Finally, each District Court, in an order on appeal before us, declined to exercise jurisdiction under the DJA and granted each Restaurant's motion to remand the case to state court.

Below, we focus on the unique aspects of the three complaints and summarize each District Court's stated reasons for declining to exercise jurisdiction under the DJA.

A. Umami

1. Complaint

In June 2020, Umami Pittsburgh, LLC filed a complaint against Motorists Commercial Mutual Insurance Company¹ in the Court of Common Pleas of Allegheny County, Pennsylvania. The central allegations of the complaint, as described in the portion summarizing Umami's "Claim for Recovery," is that Umami made an insurance claim upon Motorists for losses and "damages" caused by the COVID-19 pandemic and the associated public health orders issued by the Governor of Pennsylvania, and that Motorists wrongfully denied the claim. Motorists App'x² 591 (Compl. ¶¶ 30–32).

Umami's insurance policy, attached to its complaint, provides that coverage was in effect until October 2020. The policy contains a virus exclusion which states that Motorists "will not pay for loss or damages caused directly or indirectly by ... [a]ny virus, ... capable of inducing physical ... illness or disease." Motorists...