Rarick v. Federated Serv. Ins. Co.

• Decision Date: 28 March 2017
• Docket Number: No. 16-1328,No. 15-3606,15-3606
• Parties: Bryan RARICK, Individually and on behalf of a class of similarly situated persons v. FEDERATED SERVICE INSURANCE COMPANY, Appellant Terry Easterday; Linda Easterday, h/w individually and on behalf of a class of similarly situated persons v. The Federated Mutual Insurance Company, Appellant
• Court: U.S. Court of Appeals — Third Circuit

852 F.3d 223

Bryan RARICK, Individually and on behalf of a class of similarly situated persons

v.FEDERATED SERVICE INSURANCE COMPANY, Appellant

Terry Easterday; Linda Easterday, h/w individually and on behalf of a class of similarly situated persons

v.The Federated Mutual Insurance Company, Appellant

No. 15-3606

No. 16-1328

United States Court of Appeals, Third Circuit.

Argued November 2, 2016

Filed: March 28, 2017

Charles E. Spevacek [Argued], William M. Hart, Tiffany M. Brown, Julia J. Nierengarten, Meagher & Geer, 33 South Sixth Street, Suite 4400, Minneapolis, MN 55402, Attorneys for Defendants-Appellants

James C. Haggerty [Argued], Suzanne T. Tighe, Esq., Haggerty Goldberg Schleifer & Kupersmith, 1835 Market Street, Suite 2700, Philadelphia, PA 19103, Attorneys for Plaintiffs-Appellees

Before: CHAGARES, HARDIMAN, and SCIRICA, Circuit Judges.

OPINION OF THE COURT

HARDIMAN, Circuit Judge.

In Brillhart v. Excess Insurance Company of America , 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942), the Supreme Court held that federal courts have broad discretion to decline to hear actions arising under the Declaratory Judgment Act. Decades later the Court reminded federal courts that they have a "virtually unflagging obligation" to exercise jurisdiction over actions seeking legal relief. Colo. River Water Conservation Dist. v. United States , 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). But this "unflagging obligation" does not undermine the discretion inherent in the Declaratory Judgment Act as interpreted in Brillhart . See Wilton v. Seven Falls Co. , 515 U.S. 277, 286–88, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995).

What about complaints that seek both declaratory and legal relief? Our sister courts of appeals and district courts within the Third Circuit have disagreed over the legal standard applicable in such cases. The United States District Court for the Eastern District of Pennsylvania in the two appeals we consider here adopted a "heart of the matter" test and, after finding that the essence of each action was declaratory, declined to exercise jurisdiction. In our view, the heart of the matter test is problematic because it enables plaintiffs to avoid federal subject matter jurisdiction through artful pleading. Accordingly, we will vacate the orders of the District Court and remand the cases for further proceedings.

I

A

A resident of Pennsylvania, Brian Rarick worked for a company that insured its vehicles under a business automobile policy provided by Federated Service Insurance Company, a Minnesota corporation. Under that policy, Rarick's employer waived uninsured motorist coverage for most of its employees, including Rarick.

In his complaint, Rarick alleged that he suffered injuries after he crashed a company car insured by Federated Service when an unidentified vehicle forced him off the road. Rarick reported the accident and submitted a claim to Federated Service for uninsured motorist benefits, in accordance with the Pennsylvania Motor Vehicle Financial Responsibility Law, 75 Pa. Cons. Stat. §§ 1701, et seq . Federated Service denied the claim, citing its waiver of uninsured motorist coverage for employees like Rarick.

After his claim was denied, Rarick filed a class action lawsuit in the Court of Common Pleas of Philadelphia County, Pennsylvania. Rarick sought, inter alia , a judgment declaring that Pennsylvania's Motor Vehicle Financial Responsibility Law required Federated Service to provide Rarick with uninsured motorist coverage. Rarick also requested damages for breach of contract alleging—in nearly identical language to his prayer for declaratory relief—that Federated Service breached its contract by failing to provide him with uninsured motorist coverage.

Federated Service removed Rarick's civil action to the District Court under 28 U.S.C. §§ 1441 (removal) and 1332 (diversity jurisdiction). After the removal, no related case remained pending in state court. Later, the District Court issued an order to show cause why it should not remand the case to the Court of Common Pleas consistent with its discretion under the Declaratory Judgment Act.

The District Court adopted a "heart of the matter" test to determine whether it had discretion to decline jurisdiction. The Court determined that the crux of the litigation was declaratory because Rarick sought a declaration that he is entitled to uninsured motorist benefits. The Court then considered whether it should decline jurisdiction over the entire case under our decision in Reifer v. Westport Insurance Corp. , 751 F.3d 129 (3d Cir. 2014). Under Reifer , the absence of a pending state case created a rebuttable presumption in favor of jurisdiction. In light of "the nature and novelty of the state law issues," the Court found the presumption was rebutted, so it declined jurisdiction and remanded the case to the Court of Common Pleas. Rarick v. Federated Serv. Ins. Co. , 2015 WL 5677295, at *5 (E.D. Pa. Sept. 28, 2015). Federated Service appealed.

B

Terry Easterday, a resident of Pennsylvania, worked for an affiliate of Federated Service called Federated Mutual Insurance Company, which is a Minnesota company. Federated Mutual had a business automobile policy that waived underinsured motorist coverage.

In his complaint, Easterday alleged that he sustained injuries in two rear-end collisions while driving a car owned and insured by Federated Mutual. Easterday submitted insurance claims seeking tort damages and he later sought recovery of underinsured motorist benefits from Federated Mutual. The company denied Easterday's claim citing the waiver of underinsured motorist benefits.

Easterday, along with his wife Linda, sued in the Court of Common Pleas of Philadelphia County, Pennsylvania. The Easterdays sought, inter alia , a declaration that Pennsylvania law required Federated Mutual to provide underinsured motorist coverage. The Easterdays also requested damages for breach of contract, alleging—in nearly identical language to their prayer for declaratory relief—that Federated Mutual breached its contract by failing to provide Easterday with underinsured motorist coverage.

Federated Mutual removed the case to the District Court under 28 U.S.C. §§ 1441 (removal) and 1332 (diversity jurisdiction). After the removal, no related case remained pending in state court. At a Rule 16 conference in the District Court, Easterday raised the issue of subject matter jurisdiction.

In light of the factual similarities between the two cases, the District Court followed Rarick , 2015 WL 5677295. The Court found that the heart of the matter was declaratory because "[t]he crux of th[e] litigation is whether the insurance policy in question provides coverage to the plaintiffs." Easterday v. Federated Mut. Ins. Co. , 2016 WL 492481, *4 (E.D. Pa. Feb. 9, 2016). The Court then turned to Reifer to determine whether it should decline jurisdiction. As in Rarick , the Court found that although there was no pending parallel state court proceeding, it should nonetheless decline jurisdiction because of the novel nature of the state law claim and the absence of a federal interest. Id. Federated Mutual appealed.

II

The District Court had jurisdiction in both cases under 28 U.S.C. §§ 1441 and 1332. We have appellate jurisdiction under 28 U.S.C. § 1291. See Reifer , 751 F.3d at 133 (holding that "a remand order entered pursuant to the [Declaratory Judgment Act] is an appealable final decision"). We typically review a district court's decision to decline jurisdiction under the Declaratory Judgment Act for abuse of discretion. Id. at 138–39. However, when a district court declines jurisdiction of non-declaratory matters, we "review[ ] the underlying legal questions de novo but the court's decision to abstain for abuse of discretion." Nat'l City Mortg. Co. v. Stephen , 647 F.3d 78, 82 (3d Cir. 2011) (citations omitted). Here, we must first decide whether the District Court applied the appropriate legal standard to ascertain its discretion to decline jurisdiction. We review that question of law de novo.

III

A

A federal district court's discretion to decline jurisdiction depends on whether the complaint seeks legal or declaratory relief. When an action seeks legal relief, federal courts have a "virtually unflagging obligation" to exercise jurisdiction. Colo. River , 424 U.S. at 817, 96 S.Ct. 1236. There are but a few "extraordinary and narrow exception[s]" to this rule. Id. at 813, 96 S.Ct. 1236.

When an action seeks declaratory relief, however, federal courts may decline jurisdiction under the Declaratory Judgment Act. 28 U.S.C. § 2201(a) ("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...." (emphasis added)). Courts have greater discretion to decline jurisdiction over actions for declaratory judgments because they seek an adjudication of rights and obligations prior to the enforcement of a remedy. See Skelly Oil Co. v. Phillips Petroleum Co. , 339 U.S. 667, 671–72, 70 S.Ct. 876, 94 L.Ed. 1194 (1950) ; see also Step-Saver Data Sys., Inc. v. Wyse Tech. , 912 F.2d 643, 649 (3d Cir. 1990) ("The idea behind the [Declaratory Judgment Act] was to clarify legal relationships so that plaintiffs (and possibly defendants) could make responsible decisions about the future."); 10B Charles A. Wright & Arthur R. Miller, Fed. Prac. & Proc. Civ. § 2751 (4th ed.) ("[The Act] gives 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 and in cases in which a party who could sue for coercive relief has not yet done so."). The Supreme Court first confirmed federal courts' discretion to decline jurisdiction over declaratory judgment actions in Brillhart , 316 U.S. at 495–96, 62 S.Ct. 1173, and reaffirmed this discretion in Wilton , 515 U.S. at 288, 115 S.Ct....