Ohio Cas. Co. v. Jackson County Bank

• Decision Date: 14 April 1983
• Docket Number: No. 82-C-854.,82-C-854.
• Citation: 562 F. Supp. 1165
• Parties: The OHIO CASUALTY COMPANY, a corporation, Plaintiff, v. JACKSON COUNTY BANK, a banking corporation, and MGIC Indemnity Corporation, a corporation, Defendants.
• Court: U.S. District Court — Western District of Wisconsin

562 F. Supp. 1165

The OHIO CASUALTY COMPANY, a corporation, Plaintiff, v. JACKSON COUNTY BANK, a banking corporation, and MGIC Indemnity Corporation, a corporation, Defendants.

No. 82-C-854.

United States District Court, W.D. Wisconsin.

April 14, 1983.

Tomlinson, Gillman & Travers by Bruce Gillman, Madison, Wis., for plaintiff.

Sherman, Stutz & Lister by Berton D. Sherman, Black River Falls, Wis., for Jackson County Bank.

Bell, Metzner & Gierhart by Melissa Uelk Smith, Madison, Wis., for MGIC Indem. Corp.

MEMORANDUM AND ORDER

SHABAZ, District Judge.

This is an action for declaratory relief under 28 U.S.C. § 2201. From the pleadings and other documents in the file, the following facts emerge:

Defendant Jackson County Bank is a Wisconsin banking corporation, with its principal place of business in Black River Falls, Wisconsin. The Bank employed Verlyn A. Nelson as a loan officer. While working for the Bank, Mr. Nelson allegedly misappropriated his employer's funds and caused other damages, estimated by the Bank to exceed $1.7 million.¹

Plaintiff Ohio Casualty Insurance Company, an Ohio corporation, holds a "Bankers Blanket Bond" on behalf of the Bank. Under this bond, Ohio Casualty may be liable for up to $450,000 of the loss to the Bank allegedly caused by Mr. Nelson. Under a separate "Excess Bank Employee Dishonesty Blanket Bond," Ohio Casualty faces possible additional liability of $1 million. At the same time, defendant Bank is the potential beneficiary of an insurance policy issued by MGIC Indemnity Corporation. Under this policy, MGIC may be responsible for any liability of Verlyn A. Nelson up to $1 million.

On October 14, 1982, Ohio Casualty filed this suit. It seeks a declaration from this Court that it is not liable to the Bank on the Bankers Blanket Bond and a declaration that the Bank's losses are covered by the policy issued by MGIC.

The Bank has counterclaimed against Ohio Casualty and cross-claimed against MGIC for declaratory relief and damages. The Court takes judicial notice² of the proceedings in Jackson County Bank v. Nelson, Case No. 83-CV-16, now pending in the Circuit Court for Jackson County, Wisconsin. The complaint, filed on January 31, 1983, seeks $1.7 million in damages caused by alleged wrongful acts of Verlyn A. Nelson. The suit also names Ohio Casualty as a defendant, seeking $450,000 on the Banker's Blanket Bond and $1 million on an Excess Bank Employee Dishonesty Blanket Bond.

On February 15, 1983, Ohio Casualty filed in Circuit Court a motion to dismiss or to stay proceedings pending the outcome of this case. In an affidavit, filed the same day, Ohio Casualty's counsel averred: "... The issues in the federal action raised by the Counterclaim of the Jackson County Bank are the same as those involved in this action in that the decision and disposal of said issues in the federal action (as to the Counterclaims of the Jackson County Bank) will settle and determine all questions of fact or law involved in this action." Or to put it more simply, the Bank's counterclaim in federal court is similar to its complaint in state court.

This case is now before the Court on the Bank's motion to dismiss the complaint. The Bank raises objections to the omission of Verlyn Nelson as a party in this action, claiming that his joinder would destroy complete diversity and thus subject matter jurisdiction. The Court will not address these issues. Instead, this Court declines to exercise jurisdiction in this dispute and relegates the litigants to their appropriate remedy in state court.

The Court's decision is justified by two factors: 1) the discretionary nature of relief for actions under 28 U.S.C. § 2201; and 2) "considerations of `wise judicial administration,'" Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976).

I

28 U.S.C. § 2201 states:

In a case of actual controversy within its jurisdiction, ... any court of the United States, ... 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. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.

Declaratory relief is not a matter of right; instead, such a remedy is "committed to judicial discretion." A.L. Mechling Barge Lines, Inc. v. United States, 368 U.S. 324, 331, 82 S.Ct. 337, 341, 7 L.Ed.2d 317 (1961). See National Wildlife Federation v. United States, 626 F.2d 917, 923 (D.C.Cir. 1980) ("may" in 28 U.S.C. § 2201 intended to permit federal court, in its discretion, to withhold declaratory relief).

Such discretion, however, is not unlimited. The Court must exercise "sound" discretion, Hanes Corp. v. Millard, 531 F.2d 585, 591 (D.C.Cir.1976), in accordance with the purposes of the Declaratory Judgments Act, 28 U.S.C. § 2201. Shell Oil Co. v. Frusetta, 290 F.2d 689, 692 (9th Cir.1961).

In exercising its discretion, this Court looks first to Brillhart v. Excess Insurance Company of America, 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942)³ In Brillhart, an insurer sought a declaratory judgment to determine its rights under a reinsurance agreement. The Supreme Court, through Justice Frankfurter, described the circumstances under which federal courts in actions for declaratory judgment should defer to contemporaneous state proceedings:

Ordinarily it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in a state court presenting the same issues, not governed by federal law, between the same parties. Gratuitous interference with the orderly and comprehensive disposition of a state court litigation should be avoided.

Where a District Court is presented with a claim such as was made here, it should ascertain whether the questions in controversy between the parties to the federal suit, and which are not foreclosed under the applicable substantive law, can better be settled in the proceeding pending in the state court. This may entail inquiry into the scope of the pending state court proceeding and the nature of defenses open there. The federal court may have to consider whether the claims of all parties in interest can satisfactorily be adjudicated in that proceeding, whether necessary parties have been joined, whether such parties are amenable to process in that proceeding, etc.

Thus, where a contemporaneous state proceeding will resolve expeditiously all issues in controversy, this Court should defer to the state court proceeding by declining to exercise jurisdiction under 28 U.S.C. § 2201, especially in a matter interpreting state law.⁴ Accord: Fay v. Fitzgerald, 478 F.2d 181 (2d Cir.1973) (where contemporaneous state court proceeding will resolve the issue, putative widow's declaratory judgment action to determine entitlement to decedent's estate not entertained by federal court); Miller v. Miller, 423 F.2d 145, 148 (10th Cir.1970) (federal courts "should decline to exercise diversity jurisdiction over a declaratory judgment action raising state law issues which are being presented contemporaneously to state courts").

A. The Parties

The claims of all parties in interest may satisfactorily be adjudicated in the state court proceedings. Ohio Casualty and the Bank, present in this action, are also principal actors in the state court suit. Verlyn Nelson is also a defendant in the state court action; his status in the instant litigation is far less certain.

Furthermore, although MGIC is not named as a party in state court, this Court has no reason to doubt that it is amenable to process there.⁵ The Court also observes that Ohio Casualty should have little to say about the presence of MGIC in either action. The coverage of the Bank or Verlyn Nelson under policies issued by MGIC can be of little legal import to Ohio Casualty. In fact, this Court would question Ohio Casualty's standing to seek a declaration that the Bank's losses are covered under the MGIC policy.

B. The Issues

The Declaratory Judgments Act must not be used to resolve only particular issues without settling the entire controversy, Sears, Roebuck & Co. v. American Mutual Liability Insurance Co., 372 F.2d 435, 438 (7th Cir.1967),⁶ especially where the entire controversy may be settled by a suit in state court. American Home Assurance Co. v. Insular Underwriters Corp., 494 F.2d 317, 321 (1st Cir.1974). The purpose of 28 U.S.C. § 2201 is not advanced by trying a case piecemeal. Doby v. Brown, 232 F.2d 504, 506 (4th Cir.), cert. denied, 352 U.S. 837, 77 S.Ct. 58, 1 L.Ed.2d 55 (1956).

All issues raised in this action for declaratory judgment may be resolved in state court. In addition, the state court action will fully resolve all the issues in dispute among these parties, including several raised only by way of counterclaim or cross-claim and possibly others not raised at all in the federal suit.

C. Plaintiff's Need for Declaratory Relief

The Court should also consider plaintiff's need for declaratory relief. International Harvester Co. v. Deere & Co., 623 F.2d 1207, 1218 (7th Cir.1980). Where another available remedy would be more effective or appropriate, the Court may decline to exercise jurisdiction under 28 U.S.C. § 2201, City of Highland Park v. Train, 519 F.2d 681, 693 (7th Cir.1975), cert. denied, 424 U.S. 927, 96 S.Ct. 1141, 47 L.Ed.2d 337 (1976).

Ohio Casualty appears to argue that its defense of noncoverage due to alleged mental incapacity of Verlyn Nelson should be heard before any of the other issues in this controversy. The Court has no doubt that such a procedure, if Ohio Casualty succeeds in this Court, will save it the expense of the state court trial. Not surprisingly, Ohio Casualty has not raised the possibility of putting all the parties to the expense of a declaratory action, losing in this Court, then proceeding with the action in state court. Fur...