Manley, Bennett, McDonald & Co. v. St. Paul Fire & Marine Ins. Co.

Decision Date27 May 1986
Docket NumberNo. 85-1006,85-1006
Citation791 F.2d 460
PartiesMANLEY, BENNETT, McDONALD & CO., Plaintiff-Appellee, v. ST. PAUL FIRE & MARINE INSURANCE CO., Defendant-Third-Party Plaintiff-Appellant, v. John S. ALBRIGHT, et al., Third-Party-Defendants.
CourtU.S. Court of Appeals — Sixth Circuit

Jeannette A. Paskin, Southfield, Mich., Paul Callam (argued), for defendant-third-party plaintiff-appellant.

Robert S. Krause (argued), Detroit, Mich., for plaintiff-appellee.

Before MERRITT and JONES, Circuit Judges, and EDWARDS, Senior Circuit Judge.

MERRITT, Circuit Judge.

This is a declaratory judgment action arising out of two stockbrokers' fidelity bonds issued by St. Paul, committing it to indemnify Manley, Bennett, a stockbrokerage firm, against dishonest or fraudulent acts by its own general partners or employees. Because we find that this case is an inappropriate one for declaratory judgment, we vacate the judgment of the District Court and remand for dismissal.

I.

The dispute in this case arises out of two separate actions filed against Manley, Bennett in federal district court. The first was filed by Charles Tirone in the United States District Court for the Western District of New York; the second was filed by Lawrence Roth in the Eastern District of Michigan. The two cases were subsequently consolidated in the Western District of New York, where discovery is currently underway. The complaints allege several counts of fraud and violation of securities laws on the part of Manley, Bennett.

After the above actions were filed, Manley, Bennett contacted St. Paul regarding coverage under the bonds. The bonds exclude losses "directly or indirectly caused by ... misrepresentations as to the value of securities" or from "any violation" of the securities laws "unless such loss in the absence of such laws ... would be covered under the Insuring Agreement of this bond." The "Court Costs and Attorneys' Fees" provision allows the insuror at its "election" to defend, but, if it chooses not to defend, requires the insuror to indemnify for the costs of defending a claim covered by the policies.

St. Paul declined coverage on the theory that the cases fell outside the coverage language of the policies because the complaints alleged wrongdoing by Manley, Bennett as an entity against third parties, rather than fraud against Manley, Bennett by its own partners and employees. In addition, it declined because such wrongdoing fell within the exclusions to coverage of the bonds. Because it claimed that the complaints were not covered by the bonds, St. Paul also refused to assume the defense or commit itself to indemnify Manley, Bennett for costs incurred in defending the Tirone/Roth suits.

Manley, Bennett then filed this declaratory judgment action in the Eastern District of Michigan rather than New York where the suits are consolidated for trial. It seeks a declaration that St. Paul was obligated to provide coverage and to indemnify Manley, Bennett for the cost of the defense. District Judge Guy ruled that St. Paul was required to indemnify Manley, Bennett for court costs and attorney fees, but, as to the coverage issue, the Court granted Manley, Bennett's motion for voluntary dismissal. St. Paul appeals the ruling requiring indemnification for the cost of defense.

II.

Under the Declaratory Judgment Act, 28 U.S.C. Sec. 2201, the grant of declaratory judgment is discretionary with the trial court, but that discretion is reviewable on a de novo basis by the Court of Appeals. Thus, regardless of the District Court's action, where the Court of Appeals is of the opinion that the case is an inappropriate one for declaratory judgment, it "should decline to advise the parties as to the law and refuse to decide the issues presented." Grand Trunk Western R.R. v. Consolidated Rail Corp., 746 F.2d 323, 325-26 (6th Cir.1984)...

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