Scottsdale Ins. Co. v. Flowers

• Decision Date: 16 January 2008
• Docket Number: No. 06-6412.,No. 06-6385.,06-6385.,06-6412.
• Parties: SCOTTSDALE INSURANCE COMPANY, Plaintiff-Appellee/Cross-Appellant, v. Norman FLOWERS, Defendant, Kathleen Burke, Defendantl-Appellant/Cross-Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

513 F.3d 546

SCOTTSDALE INSURANCE COMPANY, Plaintiff-Appellee/Cross-Appellant, v. Norman FLOWERS, Defendant Kathleen Burke, Defendantl-Appellant/Cross-Appellant/Cross-Appellee.

No. 06-6385.

No. 06-6412.

United States Court of Appeals, Sixth Circuit.

Argued: October 26, 2007.

Decided and Filed: January 16, 2008.

ARGUED: Martha M. Eastman, Eastman Law Office, Louisville, Kentucky, for Appellant. John W. Walters, Golden & Walters, Lexington, Kentucky, for Appellee. ON BRIEF: Michael R. Hance, Franklin & Hance, Louisville, Kentucky, for Appellant. John W. Walters, Drew Byron Meadows, Golden & Walters, Lexington, Kentucky, for Appellee.

Before: KEITH and CLAY, Circuit Judges; STEER, District Judge.^*

OPINION

CLAY, Circuit Judge.

Defendant Kathleen Burke ("Burke") appeals the district court's amended order granting Plaintiff Scottsdale Insurance Company's ("Scottsdale") motion for declaratory judgment. Burke argues that the district court abused its discretion in exercising jurisdiction over the case pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201 (2000), and erred in its determination that Norman Flowers ("Flowers"), a therapist at the Morton Center, was not covered by the Morton Center's liability insurance policy with Scottsdale for tort damages arising from Flowers' sexual affair with Burke. Scottsdale cross appeals the district court's decision to amend the language of its original order and requests that this Court reinstate the original order. For the reasons that follow, we AFFIRM the district court's amended order.

I. BACKGROUND

In October 2001, Burke sought treatment for mental health issues at the Morton Center which referred her to Flowers, one of the Morton Center's therapists. Burke had two sessions with Flowers in October; two additional sessions in March 2002; and a session in July 2002. Several days after this last session, Burke and Flowers began a sexual relationship which lasted from July through August of 2002.

Scottsdale is the liability insurer of the Morton Center. Its contract with the Morton Center provides that Scottsdale "will pay those sums that the insured becomes legally obligated to pay as DAMAGES because of injury as a result of a WRONGFUL ACT." J.A. at 51. Wrongful act is defined as "an act, error, or omission in the furnishing of professional health care services." J.A. at 56. The insurance contract defines an "insured" for the Morton Center to include "[y]our employees and volunteers, but only for acts within the scope of their employment by you." J.A. at 53.

On March 17, 2003, Burke filed a civil tort action against Flowers and the Morton Center in Jefferson Circuit Court in Kentucky. Burke alleged that Flowers negligently breached his professional standards for treatment by engaging in sexual relations with Burke and that this conduct had caused Burke severe emotional distress. Burke further claimed that the Morton Center was negligent in hiring and supervising Flowers. Scottsdale was not joined as a defendant in this state court action. Scottsdale claims in its brief that it attempted to intervene in this state court action (but there is no evidence of such facts in the record) and its motion was denied. See Pl. Br. at 38 n. 4.

On January 13, 2006, Scottsdale filed a Complaint for Declaratory Judgment against Burke and Flowers in the United States District Court for the Western District of Kentucky. The Morton Center was never joined as a party to the dispute. Scottsdale sought a declaration that it had no duty to extend liability coverage to Flowers for the claims brought against him by Burke in state court.

On June 5, 2006, Scottsdale filed a motion for declaratory judgment against Burke. Burke's response to this motion disputed Scottsdale's characterization of the issue presented but did not request that the district court decline to exercise jurisdiction pursuant to the discretion afforded it under the Declaratory Judgment Act, 28 U.S.C. § 2201. Flowers did not file a response to the motion.

On July 25, 2006, the district court granted Scottsdale's motion and issued an opinion and order finding that Flowers' sexual affair with Burke was outside the scope of his employment as a matter of Kentucky law and concluding that Scottsdale "has no duty to extend coverage to Norman Flowers for any of the torts alleged in [the state tort action]." J.A. at 709.

On August 2, 2006, pursuant to Federal Rules of Civil Procedure 59 and 60, Burke filed a Motion to Alter, Amend or Reconsider Declaratory Judgment in which she did not directly challenge the district court's legal findings or its exercise of jurisdiction but asked the district court to amend the language of its order. Scottsdale filed a response to this motion on August 17, 2006. On August 29, 2006, in her reply to Scottsdale's response, Burke challenged the district court's decision to exercise jurisdiction over Scottsdale's declaratory judgment action and requested that the district court vacate its previous order.

On September 27, 2006, Burke filed an additional Motion to Vacate Prior Declaratory Judgment and Stay Proceedings. In this motion, Burke further elaborated her arguments against the district court's decision to exercise jurisdiction. In particular, Burke informed the district court that the Morton Center had attempted to use the district court's July 25, 2006 order to preclude litigation on the issue of the Morton Center's liability in state court. Scottsdale did not file a response to this motion.

On October 3, 2006, the district court vacated its previous opinion and order and entered an amended opinion and order. After considering the factors regarding the exercise of jurisdiction over declaratory judgments which this Court outlined in Bituminous Cas. Corp. v. J & L Lumber Co., 373 F.3d 807, 812-13 (6th Cir.2004), the district court found that its exercise of jurisdiction over Scottsdale's claim was appropriate. The district court then restated its analysis from the previous order and confirmed its holding that Flowers' sexual affair with Burke was outside the scope of his employment as a matter of Kentucky law. However, based upon Burke's arguments, the district court chose to modify the language of its order concluding that Scottsdale "has no duty to extend coverage to Norman Flowers for his sexual affair with Kathleen Burke." J.A. at 25. Finally, without discussion, the district judge denied Burke's motion to stay the proceedings as moot.

On. October 25, 2006, Burke timely filed her Notice of Appeal which was followed shortly by Scottsdale's timely Notice of Cross-Appeal.

II DISCUSSION

On appeal, Burke challenges, as an abuse of discretion, the district court's decision to exercise the jurisdiction over this appeal granted it under the Declaratory Judgment Act. She further contends that the district court erred in concluding that a therapist's sexual affair with a patient is outside the therapist's scope of employment as a matter of Kentucky law, and thereby finding that Scottsdale does not have a contractual obligation to extend tort liability insurance coverage to Flowers for his sexual affair with Burke. In its crossappeal, Scottsdale argues that the district court abused its discretion in modifying the language of its original order when issuing its amended opinion and order. We consider each of these issues in turn.

A. JURISDICTION WITH RESPECT TO PLAINTIFF'S DECLARATORY JUDGMENT ACTION

1. Preservation of the Issue for Appeal

Scottsdale argues that Burke did not preserve this issue for appeal because she failed to raise it with the district court until her reply to Scottsdale's response to Burke's motion to amend the original declaratory judgment order. See Pl. Br. at 30-32. Burke contends that the issue was not waived because it was eventually brought to the district court's attention and because the district court discussed the issue in its final amended order. See Def. Third Br. at 5-8. We agree with Scottsdale that this issue has not been properly preserved for appeal.

In general, challenges to the district court's subject matter jurisdiction are not waived by failure to raise them below and can be raised "at any time in the same civil action, even initially at the highest appellate instance." Kontrick v. Ryan, 540 U.S. 443, 455, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004) (citing Mansfield, C. & L.M.R. Co. v. Swan, 111 U.S. 379, 382, 4 S.Ct. 510, 28 L.Ed. 462 (1884)). See also Fed. R. Civ. Proc. 12(h)(3). However, on this appeal, Burke does not challenge the district court's subject matter jurisdiction, but rather its discretionary decision to entertain an action over which it has subject matter jurisdiction pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201. The Supreme Court has explained that while the Declaratory Judgment Act provides the district court with jurisdiction over such actions, the court is "under no compulsion to exercise that jurisdiction." Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942). Thus, the issue presented is not actually a jurisdictional challenge but a question of the propriety of the district court's decision to exercise its discretion with respect to the subject matter jurisdiction granted it by Congress in the Declaratory Judgment Act. See Id. Accordingly, traditional rules regarding the waiver of issues apply.

These rules generally provide that an argument not raised before the district court is waived on appeal to this Court. See United States v. Universal Mgmt. Servs., Inc., 191 F.3d 750, 759 (6th Cir. 1999); Thurman v. Yellow Freight Sys., Inc., 97 F.3d 833, 835 (6th Cir.1996); White v. Anchor Motor Freight, Inc., 899 F.2d 555, 559 (6th Cir.1990). Two main policies justify this general rule. First, the rule eases appellate review "by having the district court first consider the issue." Foster v. Barilow, 6 F.3d 405, 409 (6th Cir.1993). Second, the rule ensures fairness to litigants...