Kunkel v. Continental Cas. Co.

Decision Date30 January 1989
Docket NumberNo. 86-1662,86-1662
Citation866 F.2d 1269
PartiesElmer M. KUNKEL, William H. Dennler, John D. Lockton, Ted B. Westfall and William D. Robertson, Plaintiffs-Appellees, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellant.
CourtU.S. Court of Appeals — Tenth Circuit

Peter Van N. Lockwood, of Caplin & Drysdale, Chartered, Washington, D.C. (Joseph R. Roberts, of Rhodes, Hieronymus, Jones, Tucker & Gable, William H. Hinkle, of Doerner, Stuart, Saunders, Daniel & Anderson, Tulsa, Okl., William A. Wineberg, of Broad, Schulz, Larson & Wineberg, San Francisco, Cal., and Elihu Inselbuch, New York City, with him on the brief), for plaintiffs-appellees.

D. Kendall Griffith (Thomas M. Hamilton, David H. Levitt and Joshua G. Vincent with him on the brief), of Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for defendant-appellant.

Before ANDERSON and BALDOCK, Circuit Judges and PARKER, District Judge. *

BALDOCK, Circuit Judge.

The question presented in this case is whether the district court properly exercised jurisdiction under the Declaratory Judgment Act, 28 U.S.C. Sec. 2201, in an accountant's suit seeking a declaration as to the amount of coverage provided by his malpractice insurance policy, where the existence of coverage remains dependent upon (1) the outcome of a collateral action charging the accountant with securities law violations and (2) a determination that any liability he incurs is not excepted from the terms of the policy. We affirm.


In February 1964, defendant-appellant, Continental Casualty Company (Continental), issued an Accountants' Professional Liability Policy to the accounting firm of Kunkel & Co. The policy, which was effective through January 1967, named plaintiff-appellee, Elmer Kunkel (Kunkel) an insured. Among other things, the policy as amended limited Continental's potential liability for Kunkel's acts and omissions to "$40,000 Each Claim." The policy, however, excluded liability arising out of "any dishonest, fraudulent, criminal or malicious act or omission" on the part of the insured.

Beginning in 1973, Kunkel became a defendant in various class action lawsuits charging him and related parties with federal securities law violations. According to the allegations, Kunkel disregarded and failed to disclose material facts in preparing audit reports, registration statements and prospectuses for three security offerings by Home-Stake Production Company, an oil and gas concern. It is alleged that Kunkel's conduct renders him liable to investors in Home-Stake's 1964, 1965 and 1966 drilling projects. The actions were consolidated in the United States District Court for the Northern District of Oklahoma under Home-Stake Prod. Co. Sec. Litig., M.D.L. 153 (1974) (Home-Stake litigation).

Kunkel tendered the defense of the lawsuits to Continental in July 1974, and again in October 1976. Finally, after the filing of the second amended complaint, Continental sent a reservation of rights letter to Kunkel in April 1980, offering to pay for his defense in the Home-Stake litigation. The letter provided The charges made against you in the Second Amended Complaint allege violations of the anti-fraud and other provisions of the federal securities law, as well as charges of conspiracy.... This reservation of rights pertains to the allegations of fraud and intentional misconduct made against you by all Plaintiff class and sub-class members in the Second Amended Complaint for the reason that the coverage agreement contained in your insurance policy specifically excludes coverage for "any dishonest, fraudulent, criminal or malicious act or omission of the insured."

Because of the opinion of Continental Casualty Company that there may be no coverage extended for you under the Continental Policy ... Continental Casualty Company will not designate an attorney to represent you pursuant to this letter, but request that you designate an attorney of your own choice to represent you.... Continental Casualty Company agrees to pay reasonable attorney's fees and expenses incurred after the filing of the Second Amended Complaint....

During the course of pretrial proceedings and settlement negotiations, a dispute arose between Continental and the class action plaintiffs over the limits of liability contained in the insurance policy. Continental asserted the language "$40,000 Each Claim" limited Kunkel's coverage to $40,000 for each of the three security offerings, or $120,000. Plaintiffs and Kunkel disagreed. Because the policy placed no aggregate limit on the amount of coverage, they contended that each class member's grievance constituted a separate "claim" within the meaning of the contract.

With settlement negotiations at an impasse, Kunkel instituted this diversity action pursuant to 28 U.S.C. Sec. 1332 against Continental in the Northern District of Oklahoma in February 1984. 1 Count I of the complaint sought a declaration that the insurance policy covered the claims asserted against Kunkel in the Home-Stake litigation, while count II sought a declaration that the limits of liability extended to $40,000 for each claim propounded by the individual investors in the Home-Stake projects. 2

By agreement of the parties, the district court on January 21, 1985, stayed proceedings on count I pending the resolution of factual questions in the Home-Stake litigation which related to the coverage issue. Count II, however, became the subject of cross motions for summary judgment. During the hearing on the motions, Continental not only contested the merits of count II, but also argued that count II failed to present a justiciable controversy because Kunkel had not been held liable in the Home-Stake litigation and no determination had been made that the policy covered the class members' claims against Kunkel. On August 9, 1985, the district court resolved both issues in favor of Kunkel holding that (1) an actual controversy existed between the parties and (2) the aggregate limit of the policy was $40,000 multiplied by the number of individual claims against Kunkel. Over Continental's objection, the court granted Kunkel's motion to voluntarily dismiss count I on August 27. Continental appeals, challenging only the district court's exercise of jurisdiction over count II. Our jurisdiction to review this matter arises under 28 U.S.C. Sec. 1291. 3


The starting point for our discussion must be the relevant language of the Declaratory Judgment Act: "In a case of actual controversy within its jurisdiction ... 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. Sec. 2201 (emphasis added). As is evident from its wording, the Act embraces both constitutional and prudential concerns.

Recognizing that under our Constitution the federal judicial power extends only to "cases" or "controversies," U.S. Const. art. III, Sec. 2, Congress confined the declaratory remedy "to cases of actual controversy." United States v. Fisher-Otis Co., Inc., 496 F.2d 1146 (10th Cir.1974). Because the word "actual" has been construed as providing emphasis rather than definition, the operation of the Act is procedural only. The Act merely provides a procedure empowering a federal court to declare the legal rights and obligations of adversaries engaged in a justiciable controversy. Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240, 57 S.Ct. 461, 463, 81 L.Ed. 617 (1937).

But the existence of a "case" in the constitutional sense does not confer upon a litigant an absolute right to a declaratory judgment. Green v. Mansour, 474 U.S. 64, 72, 106 S.Ct. 423, 428, 88 L.Ed.2d 371 (1985). "The Declaratory Judgment Act was an authorization, not a command. It gave the federal courts competence to make a declaration of rights; it did not impose a duty to do so." Public Affairs Assoc., Inc. v. Rickover, 369 U.S. 111, 112, 82 S.Ct. 580, 582, 7 L.Ed.2d 604 (1962). Whether to entertain a justiciable declaratory judgment action is a matter committed to the sound discretion of the trial court. Alabama State Fed'n of Labor v. McAdory, 325 U.S. 450, 462, 65 S.Ct. 1384, 1390, 89 L.Ed. 1725 (1945).

Therefore, our inquiry is two-fold. A determination of the district court's subject matter jurisdiction is a question of law reviewable de novo on appeal. Walden v. Bartlett, 840 F.2d 771, 772-73 (10th Cir.1988). The decision of the district court to affirmatively exercise its discretion and issue a declaration under the Act in the presence of jurisdiction, however, will not be overturned absent a showing of clear abuse of that discretion. Farmers Alliance Mut. Ins. Co. v. Jones, 570 F.2d 1384, 1386 (10th Cir.), cert. denied, 439 U.S. 826, 99 S.Ct. 97, 58 L.Ed.2d 119 (1978); Western Casualty and Surety Co. v. Teel, 391 F.2d 764, 766 (10th Cir.1968). Contra Tempco Elec. Heater Corp. v. Omega Eng'r, Inc., 819 F.2d 746, 747-49 (7th Cir.1987) (decision to grant declaratory relief reviewable de novo ).


The rule prohibiting federal courts from rendering advisory opinions was first enunciated in 1793 when the Supreme Court refused to answer questions of international law submitted to Chief Justice Jay by Secretary of State Jefferson on behalf of President Washington. 3 Correspondence and Public Papers of John Jay, 488-89 (1890). Since then, the Court has sought on numerous occasions to delineate factors which separate a "case" or "controversy" from a dispute that is hypothetical, abstract or academic in character.

Construing the Declaratory Judgment Act in Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240-41, 57 S.Ct. 461, 463-64, 81 L.Ed. 617 (1937), the Court stated: "The controversy must be definite and concrete, touching the legal relations of parties having adverse legal interests. It must be a real and substantial controversy admitting of specific relief through a...

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