Gatewood Lumber, Inc. v. Travelers Indem. Co.

• Decision Date: 25 September 1995
• Docket Number: Civ. A. No. 6:95-0366.
• Citation: 898 F. Supp. 364
• Court: U.S. District Court — Southern District of West Virginia
• Parties: GATEWOOD LUMBER, INC., Plaintiff, v. TRAVELERS INDEMNITY COMPANY, Defendant.

898 F. Supp. 364

GATEWOOD LUMBER, INC., Plaintiff, v. TRAVELERS INDEMNITY COMPANY, Defendant.

Civ. A. No. 6:95-0366.

United States District Court, S.D. West Virginia, Parkersburg Division.

September 25, 1995.

H.F. Salsbery, Jr., Salsbery & Druckman, Charleston, WV, for plaintiff.

Michael L. Minsker & Charles R. Steele, Cozen & O'Connor, Charlotte, NC, for Travelers.

Susan E.F. Henderson, Burton & Kilgore, Princeton, WV, and James W. Dudley, Bluefield, VA, for J & S.

MEMORANDUM OPINION AND ORDER

HADEN, Chief Judge.

On September 7, 1994 Defendant Travelers issued a blanket property insurance policy covering Plaintiff Gatewood Lumber's business properties, including a sawmill located in Parkersburg, Wood County, West Virginia. This action had its genesis in a fire that destroyed a portion of the sawmill on September 24, 1994. At the time, the sawmill was occupied by Gatewood's tenant, J & S Hardwoods, Inc., under a lease-purchase contract.

On October 12, 1994, Gatewood filed an action in the Circuit Court of Wood County, West Virginia, alleging, inter alia, J & S breached the lease-purchase contract. J & S counterclaimed alleging Gatewood breached the contract and that J & S is entitled to the fire insurance proceeds. Gatewood and J & S are West Virginia Corporations and both filed claims with Travelers for the fire insurance proceeds. Gatewood claims it is the sole insured party under the policy. Travelers paid Gatewood's remaining mortgage balance on the sawmill building and its out-of-pocket expenses that were caused by the fire, but refuses to pay remaining amounts Gatewood claims under the policy until the payment dispute between Gatewood and J & S is resolved judicially. Travelers fears it would be exposed to the potential for multiple liability if it made payment of the total proceeds to Gatewood only. Travelers is not a party to the West Virginia action.

On May 16, 1995, Gatewood commenced the instant action alleging Travelers breached the insurance contract, engaged in bad faith, failed to investigate Plaintiff's claim properly, and attempted to settle for less than is due the insured under the contract. Gatewood and Travelers disagree about the proper measure of indemnification under the insurance policy. Gatewood seeks declaratory judgment construing the insurance contract and determining the amount of coverage provided. In its counterclaim, Travelers requests rescission of the insurance contract and a declaration establishing the rights and status of the parties, as well as the extent of its liability under the policy. Travelers also filed a third party complaint in interpleader, pursuant to Rule 22 of The Federal Rules of Civil Procedure, requesting impleader of Gatewood and J & S, that The Travelers be permitted to deposit the amount of money it agrees it owes under the policy, and asking the Court to determine the rights and interests to the proceeds as between Gatewood and J & S.

The current procedural tangle is daunting. Now pending is Gatewood's motion to quash or to strike Traveler's third party complaint in interpleader, Travelers' response to that motion, and Gatewood's reply. Gatewood threatens to join J & S as a defendant to destroy diversity jurisdiction if the Court grants Travelers' third party complaint. Also pending is Travelers' motion for bifurcation and a stay of Gatewood's claims of bad faith and statutory violations and Gatewood's response. The Court declines to resolve these motions on their merits. For reasons that follow, the Court STAYS the action and places it on the inactive docket.

I.

Our Court of Appeals has held, under the Declaratory Judgment Act, "federal courts have discretion in deciding whether to hear a declaratory judgment action." Mitcheson v. Harris, 955 F.2d 235, 237 (4th Cir.1992). Although the parties in the instant action are seeking substantive relief in addition to declaratory judgment, the substantive claims are so closely tied to the interpretation of the insurance contract the resolution of those claims is dependent on the outcome of the declaratory judgment claims. Because requests for declaratory judgment are at the heart of this case, the Court has broad discretion to stay or dismiss the action.

It is axiomatic that federal courts have a "virtually unflagging obligation ... to exercise the jurisdiction given them." Colorado River Water Conser. Dist. v. U.S., 424 U.S. 800, 817, 96 S.Ct. 1236, 1246, 47 L.Ed.2d 483 (1976), citing Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 404, 5 L.Ed. 257 (1821). The Colorado River Court noted that "the pendency of an action in the state court is no bar to proceedings concerning the same matter in the federal court having jurisdiction" Id., 424 U.S. at 817, 96 S.Ct. at 1246 (citations omitted), and that a district court may decline to exercise its jurisdiction only under "exceptional circumstances." Id. 424 U.S. at 813, 96 S.Ct. at 1244.

II.

Recent decisions have made it clear, however, a district court need not be faced with exceptional circumstances to stay or dismiss duplicative litigation in the declaratory judgment context. This year, the Supreme Court held the rules of Brillhart v. Excess Ins. Co., 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942), rather than Colorado River, governs a district court's decision to stay or dismiss a declaratory judgment action while parallel state court proceedings are pending. Wilton v. Seven Falls Co., ___ U.S. ___, ___, 115 S.Ct. 2137, 2143, 132 L.Ed.2d 214 (1995). The Wilton Court explained that:

By the Declaratory Judgment Act, Congress sought to place a remedial arrow in the district court's quiver; it created an opportunity, rather than a duty, to grant a new form of relief to qualifying litigants. Consistent with the nonobligatory 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 before trial or after all arguments have drawn to a close. In the declaratory judgment context, the normal principle that federal courts should adjudicate claims within their jurisdiction yields to considerations of practicality and wise judicial administration.

Wilton, ___ U.S. at ___, 115 S.Ct. at 2143 (footnote omitted). The Court pointed out:

Brillhart indicated that, at least where another suit involving the same parties and presenting opportunity for ventilation of the same state law issues is pending in state court, a district court might be indulging in "gratuitous interference," ibid., if it permitted the federal declaratory action to proceed.

Id. at ___, 115 S.Ct. at 2141. The Court also noted Colorado River did not deal with actions brought under the Declaratory Judgment Act and that "distinct features" of the Act "justify a standard vesting district courts with greater discretion in declaratory judgment actions than that permitted under the `exceptional circumstances' test of Colorado River and Moses H. Cone Memorial Hospital v. Mercury Const. Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)." Id. at ___, 115 S.Ct. at 2142.

Similarly, The United States Court of Appeals for the Fourth Circuit, prior to Wilton, established a framework by which a district court is to determine whether it may stay or dismiss a pending declaratory judgment action. Fourth Circuit precedent is consistent with Wilton's emphasis on the special status of declaratory judgment actions. The Court noted it had:

long recognized that it makes no sense as a matter of judicial economy for a federal court to entertain a declaratory action when the result would be to "try a controversy by piecemeal, or to try particular issues without settling the entire controversy." Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 325 (4th Cir.1937); accord 10A Charles A. Wright, et al., supra, § 2759.

Mitcheson v. Harris, 955 F.2d 235, 239 (4th Cir.1992). The Court went on to observe the inefficiencies resulting from allowing "separate suits stemming from the same overall controversy and involving overlapping issues to proceed simultaneously on parallel tracks" and to point out that following such a course "hardly husbands scarce judicial resources." Id. at 239.

The Court of Appeals has developed a two part analysis for determining whether a district court should stay or dismiss a declaratory judgment action. First, a district court is directed to consider whether the action:

(i) "`will serve a useful purpose in clarifying and settling the legal relations in issue,'" and (ii) "`will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.'" Nautilus, Ins. Co. v. Winchester Homes, Inc., 15 F.3d 371 at 375 (4th Cir.1994) (referencing White v. National Union Fire Ins. Co., 913 F.2d 165 (4th Cir.1990) and Quarles) (citations omitted).

Continental Cas. Co. v. Fuscardo, 35 F.3d 963, 965 (4th Cir.1994). Secondly, if the action meets those criteria, the district court should, according to Nautilus Insurance Co. v. Winchester Homes, 15 F.3d 371, 377 (4th Cir.1994), consider four factors:

1) the strength of the state's interest in having the issues raised in the federal declaratory action decided in state court; 2) whether the issues raised in the federal action can be more efficiently resolved in the pending state action; 3) whether the federal action in unnecessary entanglement between the federal and state systems due to overlapping issues of fact or law; 4) whether the federal action is being used merely as a device for "procedural fencing," i.e., to provide another forum in a race for res judicata. Nautilus, 15 F.3d at 377.

Continental Cas. Co. v. Fuscardo, 35 F.3d 963, 966 (4th Cir.1994). The Nautilus Court emphasized the importance of considerations of comity and federalism to a district court's decision. It pointed out:

when a federal court is confronted with an insurer's request for declaratory judgment on coverage issues during the pendency of

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