Great American Ins. v. Houston General Ins.

• Citation: 735 F. Supp. 581
• Decision Date: 24 April 1990
• Docket Number: No. 89 Civ. 4422 (PKL).,89 Civ. 4422 (PKL).
• Parties: GREAT AMERICAN INSURANCE COMPANY, Plaintiff, v. HOUSTON GENERAL INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

735 F. Supp. 581

GREAT AMERICAN INSURANCE COMPANY, Plaintiff, v. HOUSTON GENERAL INSURANCE COMPANY, Defendant.

No. 89 Civ. 4422 (PKL).

United States District Court, S.D. New York.

April 24, 1990.

Orenstein & Brown, New York City (Christopher B. Hitchcock, Eric B. Morrison, of counsel), for plaintiff.

Costello and Shea, New York City (Richard C. Browne, of counsel), Riddle & Brown, Dallas, Tex. (Brenda Neel Hight, of counsel), for defendant.

OPINION AND ORDER

LEISURE, District Judge.

This is a declaratory judgment action pursuant to 28 U.S.C. §§ 2201 and 2202. Defendant has moved for dismissal of the action or, alternatively, for transfer of the action to the United States District Court for the Northern District of Texas. For the reasons stated below, defendant's motion to dismiss is granted.

BACKGROUND

The instant action arises out of reinsurance contracts between the parties. In 1975, Equitable General Group ("Equitable"), the corporate parent of defendant Houston General Insurance Company ("Houston General"), entered into two contracts with the Constellation Reinsurance Company of New York ("Old Constellation"), under which Old Constellation agreed to reinsure certain risks underwritten by Equitable. Old Constellation was a wholly-owned subsidiary of plaintiff Great American Insurance Company ("Great American"). The contracts, known as treaties, were negotiated for Old Constellation by its agent, Constellation Reinsco Inc. ("Reinsco"), and for Equitable by its intermediary, Wilcox, Baringer & Co., Inc. ("Wilcox, Baringer"). In mid-1975, Old Constellation merged into Great American and ceased to exist. When the reinsurance treaties were renegotiated in 1976 and 1977, Great American was substituted for Old Constellation as the reinsurer.

In June 1977, Great American created a new subsidiary, using the name Constellation. This new company was sold three months later to Ticor Corporation, a company based in California. As part of the sale, Great American ceded to Constellation all its reinsurance business, including the treaties with Equitable. Great American also provided Constellation with all existing loss reserves for the reinsurance business, and entered into an agreement with Constellation whereby Great American agreed to reinsure Constellation's liability on the reinsurance business in excess of the loss reserves.

In February 1987, Constellation was placed in liquidation by a New York State Court, in accordance with New York insurance law. Similar to a federal bankruptcy proceeding, the order of liquidation terminated Constellation's corporate existence and created a liquidation estate consisting of all remaining assets. Meanwhile, beginning in 1986, Houston General paid losses reinsured under the treaties. Houston General claims that Great American owes Houston General $365,024.48 under the reinsurance contracts. Houston General apparently initially made a demand on Great American through Wilcox, Baringer. Then, by letter dated May 24, 1989, Houston General, through its counsel, made a direct demand to Great American for payment. The letter indicated that if Great American did not make payment of the amount allegedly due by June 25, 1989, Houston General would consider filing suit for the amount in controversy. See Affidavit of Christopher B. Hitchcock, Esq., sworn to on September 7, 1989 ("Hitchcock Aff."), Exhibit B Great American responded to Houston General on June 21, 1989, indicating that it had been able to verify its liability on only $33,000 of the amount claimed. It admitted that it did owe that money, and stated that it was willing to pay that sum on condition that Houston General waive all claims against the estate of Constellation as to that amount. Great American then requested an additional sixty days to determine its liability as to the remaining amount demanded by Houston General. See Hitchcock Aff. Exhibit C. Houston General did not immediately respond to Great American's letter, and on June 23, 1989, two days after requesting an extension from Houston General, and apparently without again contacting Houston General regarding such an extension, Great American filed an action in this Court.

Great American's action was brought by way of order to show cause. As originally pleaded, Great American's claim was for interpleader relief pursuant to 28 U.S.C. § 1335 against both Houston General and the New York State Superintendent of Insurance, as liquidator of Constellation. Great American sought an injunction preventing institution of any actions regarding Houston General's claims under the reinsurance treaties. At the time of the issuance of the order to show cause, the Court entered a temporary restraining order preventing Houston General from filing any action against Great American or the Constellation liquidation estate regarding the claims under the treaties.

After some delay to allow sufficient time for submissions of papers on Great American's motion seeking injunctive relief and defendants' cross-motion to dismiss, a hearing was held before the Court on July 25, 1989 regarding the propriety of Great American's interpleader action. After hearing the arguments of counsel, the Court announced a decision which found that the interpleader action was improperly brought, and that, further, this Court should abstain from exercising jurisdiction over Great American's claims in light of the ongoing state liquidation proceedings which would adequately protect Great American's rights in relation to the Constellation liquidation estate. Thus, the Court dismissed the interpleader claims and vacated the temporary restraining order.

One day before the injunction hearing, Great American filed, as of right, an amended complaint which added a cause of action for a declaratory judgment against Houston General that Great American's liability to Houston General is limited to $33,000. After the dismissal of the interpleader claims, only this declaratory judgment claim remains in this Court. On July 26, 1989, after the temporary restraining order was vacated by the Court, Houston General filed an action against Great American in Texas state court for the $365,024.48 that Houston General alleges it is owed. That action was subsequently removed by Great American to the United States District Court for the Northern District of Texas, Fort Worth Division, where it is still pending. Houston General then filed the instant motion to dismiss the remaining declaratory judgment action in this Court, or, in the alternative, to transfer it to the Northern District of Texas.

DISCUSSION

Historically, federal district courts did not have the power to entertain declaratory judgment actions. In 1933, the Supreme Court held that review of a state declaratory judgment was within the judicial power, thus resolving doubts about the constitutionality of a declaratory judgment action in the federal courts. Nashville, C. & S.L.R. Co. v. Wallace, 288 U.S. 249, 53 S.Ct. 345, 77 L.Ed. 730 (1933). The next year, Congress passed the Declaratory Judgment Act, now codified at 28 U.S.C. §§ 2201, 2202, permitting the federal courts to hear declaratory judgment actions. Fed.R.Civ.P. 57 makes all declaratory judgment actions subject to the Federal Rules of Civil Procedure.

The Second Circuit has recently explored the function of a declaratory judgment action.

The purpose of the Declaratory Judgment Act has been expressed in a variety of ways: "Essentially, a declaratory relief action brings an issue before the court that otherwise might need to await a coercive action brought by the declaratory relief defendant," Mobil Oil Corp. v. Long Beach, 772 F.2d 534, 539 (9th Cir.1985); the fundamental purpose of the Declaratory Judgment Act is to "`avoid accrual of avoidable damages to one not certain of his rights and to afford him an early adjudication without waiting until his adversary should see fit to begin suit, after damage has accrued'," Luckenbach Steamship Co. v. United States, 312 F.2d 545, 548 (2d Cir. 1963) (quoting E. Edelmann & Co. v. Triple-A Specialty Co., 88 F.2d 852, 854 (7th Cir.), cert. denied, 300 U.S. 680, 57 S.Ct. 673, 81 L.Ed. 884 (1937)); the primary purpose of the Declaratory Judgment Act is to have a declaration of rights not already determined, not to determine whether rights already adjudicated were adjudicated properly, Hurley v. Lindsay, 207 F.2d 410, 411 (4th Cir. 1953); the declaratory judgment procedure "creates a means by which rights and obligations may be adjudicated in cases involving an actual controversy that has not reached the stage at which either party may seek a coercive remedy, or in which the party entitled to such a remedy fails to sue for it," Wright, The Law of Federal Courts § 100, at 671 (4th ed. 1983); the declaratory judgment procedure "enables a party who is challenged, threatened, or endangered in the enjoyment of what he claims to be his rights, to initiate the proceedings against his tormentor and remove the cloud by an authoritative determination of plaintiff's legal right, privilege and immunity and the defendant's absence of right, and disability," Borchard, Declaratory Judgments 280 (2nd ed. 1941).

United States v. Doherty, 786 F.2d 491, 498-99 (2d Cir.1986) (Friendly, J.).

Section 2201 requires that a "case of actual controversy" exist before a party can bring a declaratory action. That is, "the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273, 61 S.Ct. 510, 512, 85 L.Ed. 826 (1941). Further, a declaratory judgment action must have an independent basis for jurisdiction and venue, as 28 U.S.C. § 2201 does not create an independent basis for federal jurisdiction. Warner-Jenkinson Co. v. Allied Chemical Corp., 567 F.2d 184,...