Golden Eagle Ins. Co. v. Travelers Companies

• Decision Date: 24 December 1996
• Docket Number: No. 94-56211,94-56211
• Citation: 103 F.3d 750
• Parties: 96 Daily Journal D.A.R. 15,475 GOLDEN EAGLE INSURANCE COMPANY, Plaintiff-Appellant, v. TRAVELERS COMPANIES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 750

103 F.3d 750

96 Daily Journal D.A.R. 15,475

GOLDEN EAGLE INSURANCE COMPANY, Plaintiff-Appellant, v. TRAVELERS COMPANIES, Defendant-Appellee.

No. 94-56211.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 4, 1996.

Decided Sept. 6, 1996.

As Amended on Denial of Rehearing Sept. 20, 1996.

Further Amended Opinion Dec. 24, 1996.

Richard P. Edwards, McNitt, Edwards & Schraner, San Diego, California, for plaintiff-appellant.

William C. Morison-Knox, Sonnenschein Nath & Rosenthal, San Francisco, California, for defendant-appellee.

Appeal from the United States District Court for the Southern District of California, Judith N. Keep, Chief District Judge, Presiding. D.C. No. CV-93-01558-JNK.

Before: WIGGINS, THOMPSON and TROTT, Circuit Judges.

ORDER

The amended opinion filed September 20, 1996, 95 F.3d 807, is further amended.

Appellant Golden Eagle Insurance Company's petition for rehearing is DENIED.

OPINION

DAVID R. THOMPSON, Circuit Judge:

Golden Eagle Insurance Company brought this action in state court seeking a declaratory judgment that Charter Oak Fire Insurance Company ¹ had a duty to defend Aero-Crete, Inc. in a construction defect case. Charter Oak removed the action to the federal district court. The district court granted summary judgment for Charter Oak. Golden Eagle appeals. The principal issue on appeal is whether the district court properly exercised its diversity jurisdiction over this declaratory relief action involving state law. See, e.g., Employers Reinsurance Corp. v. Karussos, 65 F.3d 796 (9th Cir.1995).

We hold that the district court erred in exercising its jurisdiction to hear this case. The case is a quintessential declaratory relief action between insurance companies arguing over a duty to defend the insured under state law. In such a case the district court is required to exercise its discretion under the Declaratory Judgment Act, 28 U.S.C. § 2201, and decide whether to hear the case. The district court did not do this. It simply decided the case. The court erred in so doing, but this error is harmless because, except for this appeal, the case has been completed and the district court correctly decided it on the merits under the applicable state law.

The district court had diversity jurisdiction under 28 U.S.C. § 1332. We have appellate jurisdiction under 28 U.S.C. § 1291, and we affirm.

I FACTS

Aero-Crete ² performed concrete work in the construction of a San Diego apartment building. Upon completion, Pieri-Debbas Enterprises, the owner, sold the building. The Dale Village Apartment Company, a later owner, discovered alleged construction defects and sued Pieri-Debbas in state court for negligence, breach of implied warranty, and strict liability. ³ Pieri-Debbas cross-complained against Aero-Crete and its other subcontractors for indemnity and contribution.

Charter Oak and Golden Eagle had issued general liability insurance policies to Aero-Crete. Charter Oak's policies covered property damage resulting from an "occurrence" during the period from August 1, 1985, to August 1, 1988. Golden Eagle's policies covered the periods from July 1, 1989 to July 1, 1991, and from July 1, 1992, to July 1, 1993.

Golden Eagle defended Aero-Crete against Pieri-Debbas's cross-complaint in the state action. Charter Oak refused to defend Aero-Crete on the ground the alleged property damage did not "occur" during the period of any Charter Oak policy. This prompted Golden Eagle to file this action against Charter Oak in San Diego Superior Court for declaratory relief, indemnity, and contribution. Charter Oak removed the action to federal court on the basis of diversity of citizenship. The parties filed cross-motions for summary judgment regarding Charter Oak's duty to defend Aero-Crete in the underlying state action. The district court granted summary judgment for Charter Oak, concluding Charter Oak had no duty to defend Aero-Crete.

Back in state court, the underlying action of Pieri-Debbas v. Aero-Crete went to trial. Aero-Crete obtained a defense verdict, and that action is now concluded.

During the pendency of this appeal Aero-Crete filed its own state court action in the San Diego Superior Court against Charter Oak seeking damages for Charter Oak's failure to defend it against Pieri-Debbas's cross-complaint. Aero-Crete's complaint against Charter Oak alleged breach of an implied covenant of good faith and fair dealing, interference with prospective economic advantage and contractual relationships, malicious prosecution, abuse of process, and declaratory relief. Charter Oak removed that case to the United States District Court for the Southern District of California where it is now pending. ⁴

This current appeal is Golden Eagle's appeal from the district court's decision on summary judgment in Golden Eagle's declaratory relief action against Charter Oak.

II DISCUSSION

A. Abstention

The complaint Golden Eagle filed in state court for declaratory relief was filed under California's declaratory relief statute, California Code of Civil Procedure Section 1060. When Charter Oak removed the case to federal court, based on diversity of citizenship, the claim remained one for declaratory relief, but the question whether to exercise federal jurisdiction to resolve the controversy became a procedural question of federal law. Haagen-Dazs Shoppe v. Born, 897 F.Supp. 122, 126, 126 n. 2 (S.D.N.Y.1995); Fischer & Porter Co. v. Moorco Int'l, 869 F.Supp. 323, 326 (E.D.Pa.1994); DeFeo v. Procter & Gamble Co., 831 F.Supp. 776, 779 (N.D.Cal.1993); National R.R. Passenger Corp. v. Consolidated Rail Corp., 670 F.Supp. 424, 429 n. 7 (D.D.C.1987); 19 Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction 2d § 4505, at 71-72 (2d ed. 1996); Schwarzer, Tashima & Wagstaffe, California Practice Guide: Federal Civil Procedure Before Trial p 10:33.5 (1996). Because the current issue involves only a choice of forum and is grounded in considerations of judicial economy and comity, federal law, rather than state law, governs whether the district court should abstain.

The Declaratory Judgment Act, 28 U.S.C. § 2201, is the procedural statute under which a federal court determines whether to exercise its jurisdiction to hear a case such as the present one. The Declaratory Judgment Act does not itself confer federal subject matter jurisdiction. Staacke v. United States Secretary of Labor, 841 F.2d 278, 280 (9th Cir.1988). There must be an independent basis for such jurisdiction. Id. The parties predicate subject matter jurisdiction on diversity of citizenship. 28 U.S.C. § 1332. Because the parties satisfy the requirements for diversity jurisdiction, the district court had subject matter jurisdiction to hear this case. The question is whether the district court should, nevertheless, have remanded the case back to state court by exercising its judicial discretion not to hear it.

Federal courts have a "virtually unflagging obligation ... to exercise the jurisdiction given them." Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 1246, 47 L.Ed.2d 483 (1976). There are, however, exceptions to this rule.

In Brillhart v. Excess Ins. Co. of America, 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942), the Supreme Court held that a district court is not required by the Declaratory Judgment Act to exercise its jurisdiction. Id. at 494, 62 S.Ct. at 1175. More recently, the Supreme Court reaffirmed this holding and explained its rationale:

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 v. Seven Falls Co., 515 U.S. 277, ----, 115 S.Ct. 2137, 2143, 132 L.Ed.2d 214 (1995).

In this circuit, we have held that "practicality and wise judicial administration" considerations "generally counsel against the exercise of federal-court jurisdiction over claims for declaratory relief that involve only state law questions and are brought during the pendency of a related state court proceeding. Certainly that is the case with insurance coverage disputes." Employers Reinsurance Corp. v. Karussos, 65 F.3d 796, 801 (9th Cir.1995). See also American Nat'l Fire Ins. Co. v. Hungerford, 53 F.3d 1012, 1019 (9th Cir.1995); Continental Cas. Co. v. Robsac Indus., 947 F.2d 1367, 1374 (9th Cir.1991).

Although our case law has applied the Brillhart doctrine only in cases where a parallel proceeding exists in state court, nothing in the Declaratory Judgment Act requires a parallel state proceeding in order for the district court to exercise its discretion to decline to entertain the action. Clearly, the existence of a parallel state proceeding would be a major factor in the district court's consideration of "practicality and wise judicial administration," but the absence of a parallel state proceeding is not necessarily dispositive; the potential for such a proceeding may suffice. See Wilton, 515 U.S. at ----, 115 S.Ct. at 2144 ("We do not attempt ... to delineate the outer boundaries of that discretion in other cases, for example, ... cases in which there are no parallel state proceedings").

In deciding whether a district court abuses its discretion by deciding to hear a declaratory relief action, we consider whether "there are circumstances present to warrant an exception to the general rule that the action belongs in state rather than federal court." Karusso...