Mid–Continent Cas. Co. v. Vill. at Deer Creek Homeowners Ass'n, Inc.

• Decision Date: 18 July 2012
• Docket Number: No. 11–3367.,11–3367.
• Citation: 685 F.3d 977
• Parties: MID–CONTINENT CASUALTY COMPANY, Plaintiff–Appellant, v. The VILLAGE AT DEER CREEK HOMEOWNERS ASSOCIATION, INC., Defendant–Appellee, and Daniel J. Barnard; Greater Midwest Builders, Ltd., Defendants.
• Court: U.S. Court of Appeals — Tenth Circuit

685 F.3d 977

MID–CONTINENT CASUALTY COMPANY, Plaintiff–Appellant,

v. The VILLAGE AT DEER CREEK HOMEOWNERS ASSOCIATION, INC., Defendant–Appellee,andDaniel J. Barnard; Greater Midwest Builders, Ltd., Defendants.

No. 11–3367.

United States Court of Appeals, Tenth Circuit.

July 18, 2012.

Diane K. Watkins, Wagstaff & Cartmell, LLP, Kansas City, MO (Vincent F. O'Flaherty, Law Offices of Vincent F. O'Flaherty, Attorney, LLC, Kansas City, MO, and Adam S. Davis, Wagstaff & Cartmell, LLP, Kansas City, MO, on the briefs), for Plaintiff–Appellant.

John R. Weist (Scott C. Long with him on the brief), Long & Luder, P.A., Overland Park, KS, for Defendant–Appellee.

Before KELLY, MURPHY, and HARTZ, Circuit Judges.

MURPHY, Circuit Judge.

I. Introduction

Plaintiff–Appellant Mid–Continent Casualty Company (“Mid–Continent”) brought a declaratory judgment action in the United States District Court for the District of Kansas, seeking determination of its coverage obligations related to construction defect litigation. Defendant–Appellee, The Village at Deer Creek Homeowners Association, Inc. (the “Association”), moved to dismiss, requesting that the district court not exercise jurisdiction over Mid–Continent's action. Weighing the five factors set forth in State Farm Fire & Casualty Co. v. Mhoon, 31 F.3d 979, 982–83 (10th Cir.1994), the district court declined jurisdiction in favor of resolution in Missouri state court and dismissed the action. Mid–Continent appeals, arguing the district court's application of the Mhoon factors amounts to an abuse of discretion. Exercising jurisdiction pursuant to 28 U.S.C. § 1291, this court affirms.

II. Background

The relevant facts are not in dispute. In 2007, the Association and numerous individual homeowners sued Greater Midwest Builders, Inc. (“Greater Midwest”) and its president, Daniel J. Barnard, in state court in Johnson County, Kansas, alleging Greater Midwest was negligent in constructing a subdivision development. At the time of the alleged negligent construction, Greater Midwest was insured by Mid–Continent and State Automobile Insurance Company (“State Auto”). Greater Midwest therefore demanded legal defense and indemnification from Mid–Continent and State Auto. In February, 2009, with the Johnson County suit still pending, Mid–Continent filed the action giving rise to this appeal in the District of Kansas, seeking a declaration that the terms of its policy did not cover any of the claims asserted against Greater Midwest in state court. On the motion of Greater Midwest and Barnard, the district court entered an order staying proceedings in the declaratory judgment action until the Johnson County action was concluded.

The Johnson County suit concluded on February 10, 2011, with a verdict against Greater Midwest for over $7 million. On February 16, 2011, the Association and other plaintiffs in the Johnson County action filed a petition for equitable garnishment against State Auto, Mid–Continent, and Greater Midwest in state court in Jackson County, Missouri (“first garnishment action”). State Auto removed the first garnishment action to federal court in the Western District of Missouri. There, Mid–Continent moved to sever the actions against it and State Auto and transfer venue of the case against it to the District of Kansas. At the same time, Mid–Continent moved to lift the October 2009 stay in the declaratory judgment action.

The plaintiffs in the first garnishment action filed a notice of voluntary dismissal in the Western District of Missouri. Approximately two weeks later, they filed a second garnishment action against State Auto and Mid–Continent in Jackson County, Missouri (“second garnishment action”). The second suit named Greater Midwest as a plaintiff rather than a defendant. The Association then responded to Mid–Continent's motion to lift the stay in the declaratory judgment action and moved to dismiss Mid–Continent's declaratory judgment action. On April 1, 2011, State Auto again removed the second garnishment action to the Western District of Missouri. The plaintiffs in the second garnishment action (the Association, Greater Midwest, and the individual homeowners) moved to remand to the Jackson County Circuit Court, and Mid–Continent again moved to sever and transfer venue to the District of Kansas. The Western District of Missouri granted the motion to remand due to lack of complete diversity between the parties. Thus, at the time the Kansas federal district court ruled on Mid–Continent's Motion to Lift Stay and the Association's Motion to Dismiss in this matter, the second garnishment action remained pending against Mid–Continent in state court in Jackson County, Missouri. On November 17, 2011, the Kansas district court granted the motion to dismiss.

III. DiscussionA. Statutory Framework

The Declaratory Judgment Act provides, in relevant part: “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. § 2201(a) (emphasis added). Because of the Act's use of the word “may,” the Supreme Court has held it confers upon courts the power, but not the duty, to hear claims for declaratory judgment. Wilton v. Seven Falls Co., 515 U.S. 277, 286–87, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995); Pub. Affairs Assoc., Inc. v. Rickover, 369 U.S. 111, 112, 82 S.Ct. 580, 7 L.Ed.2d 604 (1962) (“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.”). In determining whether to exercise their discretion, district courts should consider the following factors:

[1] whether a declaratory action would settle the controversy; [2] whether it would serve a useful purpose in clarifying the legal relations at issue; [3] whether the declaratory remedy is being used merely for the purpose of procedural fencing or to provide an arena for a race to res judicata; [4] whether use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction; and [5] whether there is an alternative remedy which is better or more effective.

Mhoon, 31 F.3d at 983 (quotations omitted). The parties agreed below, and agree now on appeal, that the Mhoon factors are the appropriate rubric for the district court to consider whether to exercise jurisdiction over Mid–Continent's declaratory action.¹

B. Standard of Review

While the parties agree that the standard of review is abuse of discretion, Mid–Continent also notes that a district court can abuse its discretion when its decision is based on clearly erroneous factual findings or the misapplication of legal standards. See Kiowa Indian Tribe of Okla. v. Hoover, 150 F.3d 1163, 1165 (10th Cir.1998). When reviewing for abuse of discretion, the court “must carefully scrutinize the district court's exercise of its discretion, but we may not substitute our own judgment for that of the trial court.” Id. (quotation and alteration omitted). The obligation not to substitute this court's judgment for that of the district court is especially important when reviewing a district court's analysis of the Mhoon factors:

While imposing on the trial court the obligation to weigh these various factors when deciding whether to hear a declaratory judgment action, this circuit has repeatedly over the years held that on appeal it will not engage in a de novo review of all the various fact-intensive and highly discretionary factors involved. Instead, it will only ask whether the trial court's assessment of them was so unsatisfactory as to amount to an abuse of discretion.

Mhoon, 31 F.3d at 983. An abuse of discretion has been characterized as “an arbitrary, capricious, whimsical, or manifestly unreasonable judgment.” RoDa Drilling Co. v. Siegal, 552 F.3d 1203, 1208 (10th Cir.2009) (quotation omitted). Put differently, “[u]nder the abuse-of-discretion standard, a trial court's decision will not be disturbed unless the appellate court has a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances.” Oklahoma ex rel. Edmondson v. Tyson Foods, Inc., 619 F.3d 1223, 1232 (10th Cir.2010) (quotation omitted).

C. Mhoon Factors

1. Factors 1 and 2—Whether the Declaratory Judgment Action Would Settle the Controversy or Clarify the Legal

Relations At Issue ²

The district court considered the first two Mhoon factors together and concluded each favored dismissal. The court concluded exercise of its declaratory judgment jurisdiction would be unnecessarily duplicative and uneconomical because the second equitable garnishment action in Jackson County would resolve all issues presented in Mid–Continent's federal declaratory judgment action, whereas the declaratory judgment action would not resolve all issues presented in the state equitable garnishment action. Both parties agreed the Jackson County action would require the state court to determine whether Mid–Continent must indemnify Greater Midwest under the terms of Greater Midwest's insurance policy. By contrast, several claims in the second equitable garnishment action would remain unresolved after resolution of the declaratory judgment action. For example, the equitable garnishment action includes claims for bad faith failure to settle, breach of fiduciary duty, and breach of contract. Additionally, the district court noted the declaratory judgment action would not resolve the issue of State Auto's liability.

Mid–Continent argues the district court's analysis of the first Mhoon factor amounted to an abuse of discretion for six reasons. These arguments, whether considered individually or collectively, fall far short of demonstrating the district court...