Scottsdale Ins. Co. v. Roumph

• Decision Date: 08 March 2000
• Docket Number: No. 98-1950,DEFENDANTS-APPELLEES,PLAINTIFF-APPELLANT,98-1950
• Citation: 211 F.3d 964
• Parties: (6th Cir. 2000) SCOTTSDALE INSURANCE COMPANY,, v. BEVERLY ROUMPH, INDIVIDUALLY AND AS NEXT FRIEND OF LAVINA ROUMPH; LAVINA ROUMPH, Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 964

211 F.3d 964 (6th Cir. 2000)

SCOTTSDALE INSURANCE COMPANY, PLAINTIFF-APPELLANT, v. BEVERLY ROUMPH, INDIVIDUALLY AND AS NEXT FRIEND OF LAVINA ROUMPH; LAVINA ROUMPH, DEFENDANTS-APPELLEES.

No. 98-1950

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: March 8, 2000

Decided and Filed: May 4, 2000

Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 97-73396--Gerald E. Rosen, District Judge.

Ronald S. Lederman, Thomas L. Auth, Jr., Sullivan, Ward, Bone, Tyler & Asher, P.C., Southfield, Michigan, for Appellant.

Mark R. Bendure, Bendure & Thomas, Detroit, Michigan, David J. Cooper, West Bloomfield, Michigan, for Defendants-Appellees.

Before: Wellford, Siler, and Gilman, Circuit Judges.

OPINION

Harry W. Wellford, Circuit Judge.

In 1995 defendant herein, Beverly Roumph, as next friend for Lavina Roumph, filed a state tort action in the Wayne County Circuit Court in Michigan, based upon a sexual assault upon her young daughter. Ms. Roumph alleged that she had accepted minor Keith Kelley, Jr., into her home as a foster child upon placement by The Children's Center, a Michigan social welfare agency. Within a month, Kelley raped four-year-old Lavina Roumph, defendant's daughter. Roumph's second amended complaint in the state action alleged negligence and/or gross negligence by The Children's Center in failing to disclose pertinent information regarding possible danger to her and the foster family; failing to warn the foster family that Kelley had been sexually abused and had a history of molesting other children; failing properly to review his file;¹ and failing to properly recommend and provide psychiatric or psychological treatment for Kelley. Scottsdale Insurance Company ("Scottsdale"), plaintiff in this proceeding, insured The Children's Center and provided its defense under a reservation of rights in the state proceeding. The Scottsdale policy with The Children's Center provided general liability coverage of $3,000,000 but contained a "Sexual Misconduct Limitation Endorsement" which limited coverage to $100,000:

"Sexual misconduct" means any action or behavior, or any physical contact or touching, which is intended to lead to, or which culminates in any sexual act, arising out of the professional treatment and care of any client, patient, or any other person whose care has been entrusted to the named insured, whether committed by, caused by or contributed to by failure of any insured to:

1. Properly train, hire or supervise any employee, or;

2. Properly control, monitor or supervise the treatment and care of any client, patient, or any other person whose care has been entrusted to the named insured.

In the state court proceedings the issue arose as to whether Scottsdale's applicable policy limits in the case were $3,000,000 or only $100,000 under the special endorsement. Scottsdale filed this declaratory action under 28 U.S.C. § 2201 in the United States District Court for the Eastern District of Michigan on July 14, 1997, seeking a ruling on applicable limits in the state court action.

At the beginning of the state trial, The Children's Center, with Scottsdale's consent, admitted liability, and the parties on February 2, 1998, made the following agreement:

One, Children's Center will admit liability. Two, case will proceed against Children's Center as to damages only. Three, the individual defendants, Wheeler, Skowronski, and Potje will be dismissed with prejudice without a release.

. . . . Four, plaintiffs will not seek to enforce any judgment against Children's Center over and above the insurance policy limits.

Five, defendants Wheeler, Skowronski and Potje were employees of the Children's Center during their respective periods of employment and acted within the scope of employment as to the matters in this action.

. . . . That nothing contained in this agreement eviscerate any coverage under the existing insurance policy, including any taxable costs or interest.

. . . . This agreement is predicated upon the representation that Children's Center has a liability policy with $3 million general limit and a $100,000 sexual misconduct limit that is covering this occurrence and that the only claim regarding the extended coverage is that claim currently stated in the pending declaratory judgment action.

(Emphasis added.) Co-defendant Lula Belle Stewart Center, Inc., alleged agent of The Children's Center, was dismissed from the suit with prejudice and without costs per a March 20, 1998 order after settling with Roumph for $1,000,000, the amount of its separate insurance liability coverage. Due to the stipulation entered in the state court, Scottsdale asserts that it was not necessary to offer evidence regarding the nature and extent of negligence of the insured as "defined by the admitted factual and legal allegations in the First Amended Complaint filed in the state court action."

The state court jury returned an $8,000,000 verdict for Roumph on February 12, 1998, and a judgment was entered on June 12, 1998, whereby Roumph reportedly recovered the net amount of $6,233,857.32. After entry of judgment but while a motion for new trial and a motion for remittitur were pending, Roumph, on February 17, 1998, filed a motion for a stay or dismissal in the district court. Scottsdale filed a response and, following a hearing, the district court granted Roumph's motion and dismissed the action without prejudice in August of 1998. The district court also dismissed, without prejudice, the parties' cross-motions for summary judgment. Scottsdale timely filed a notice of appeal.

It is important to note that Scottsdale also appealed the state court judgment on behalf of its insured, The Children's Center,² and that appeal is presently pending before the Michigan Court of Appeals. Roumph has filed a declaratory judgment action in the Michigan state court seeking a ruling on the coverage issue, but the record does not reflect when that action was filed, and the state court has not yet taken action on the case.

We are presented with the issue, not a new one from Michigan, of whether the district court abused its discretion in declining to entertain plaintiff Scottsdale's declaratory judgment action, which sought a ruling on the applicable policy limits for its pending state court tort action.

This court reviews the district court's exercise of discretion under the Declaratory Judgment Act, 28 U.S.C. § 2201(a), for abuse of discretion. See Wilton v. Seven Falls Co., 515 U.S. 277, 289-90 (1995) (replacing de novo standard applied in, e.g., Allstate Ins. Co. v. Mercier, 913 F.2d 273, 277 (6th Cir. 1990)). Plaintiff relies upon Allstate Ins. Co. v. Green, 825 F.2d 1061 (6th Cir. 1987), wherein this Court held that no per se rule applied to prevent district courts from exercising jurisdiction over declaratory actions in circumstances somewhat akin to this one. Under de novo review, this Court reversed the district court's dismissal of the declaratory action because the district judge "failed to exercise any discretion, but felt himself bound to dismiss based on our decisions in American Home and Manley, Bennett," and the Court remanded "to permit that court to assess the propriety of the action pursuant to the general considerations, as well as the five-factor test." Green, 825 F.2d at 1065, 1067 (citing Manley, Bennett, McDonald & Co. v. St. Paul Fire & Marine Ins. Co., 791 F.2d 460, 462 (6th Cir. 1986) (de novo review)); see Mercier, 913 F.2d at 277 ("When the record contains no indication that the district court considered these criteria and factors, this court has the option either to apply them on appeal or to remand to the district court for this exercise.").

Several of the cases mentioned from Michigan involved insurance carriers seeking a declaratory judgment in federal court about defense and coverage when their insureds have been sued for alleged tort liability in state court concerning situations perceived as a "race to the courthouse," state or federal, for a declaratory judgment determination. In many of these cases we decided that not proceeding in the federal case was the wise and rational course of action. As pointed out by the district court, we have generally considered five factors to assess the propriety of the federal court's exercise of discretion in such a situation:

(1) whether the judgment would settle the controversy;

(2) whether the declaratory judgment action would serve a useful purpose in...