U.S. Specialty Ins. Co. v. Aerial Timber Applicators, Inc.

• Decision Date: 08 July 2020
• Docket Number: Case No. 3:19-cv-00271
• Parties: U.S. Specialty Insurance Company, Plaintiff, v. Aerial Timber Applicators, Inc., Defendant.
• Court: U.S. District Court — District of North Dakota

U.S. Specialty Insurance Company, Plaintiff,
v.
Aerial Timber Applicators, Inc., Defendant.

Case No. 3:19-cv-00271

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NORTH DAKOTA EASTERN DIVISION

July 8, 2020

ORDER GRANTING DEFENDANT'S MOTION TO STAY

Before the Court is Defendant Aerial Timber Applicators, Inc.'s ("Aerial Timber") motion to dismiss or stay proceedings filed on January 10, 2020. Doc. No. 18. The motion seeks to halt the declaratory judgment action in this Court in favor of a lawsuit Aerial Timber filed in Texas state court. On January 30, 2020, Plaintiff U.S. Speciality Insurance Company ("USSIC") responded in opposition to the motion. Doc. No. 20. Aerial Timber filed a reply on February 12, 2020. Doc. No. 23. For the reasons below, the motion to stay is granted.

I. BACKGROUND

USSIC is a Texas insurance company with its principal place of business in Plano, Texas. Doc. No. 1, ¶ 2. USSIC holds a license to sell insurance in North Dakota. Doc. No. 21-1. Aerial Timber is a North Dakota corporation headquartered in Cooperstown, North Dakota. Doc. No. 1, ¶ 3. Aerial Timber owns and operates a fleet of fire-fighting aircraft. Id. ¶ 6. Government entities contract with Aerial Timber to fight wildfires. Id. USSIC issued an Aircraft Insurance Policy ("Policy") to Aerial Timber effective from May 23, 2017 through May 1, 2018. Doc. No. 18-2.

Among its aircraft fleet, Aerial Timber owns a 1993 Air Tractor AT802-A with a tail number of N91092 ("Air Tractor"). Doc. No. 1, ¶ 7. A Pratt & Whitney PT6 turbine engine powers the Air Tractor. Id. The engine draws air in through an intake behind the propeller at the

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front of the aircraft. Id. ¶ 8. Following combustion, the engine emits exhaust through large exhaust stacks on the sides of the engine compartment. Id.

On July 13, 2017, Aerial Timber pilot Tom Hlavnicka landed the Air Tractor in Wells, Nevada, where he intended to refuel. Id. ¶ 9. Upon landing, he tried to shut down the engine. Id. But the engine failed to shut down completely. Id. Hlavnicka soon observed flames belching from the exhaust stacks. Id. In reaction, he attempted to restart the engine twice to no avail. Id. Ground crew personnel then quelled the flames by discharging dry fire extinguishers into the exhaust stacks. Id. The engine sustained permanent damage, requiring extensive repairs. Id. ¶¶ 10, 13.

Aerial Timber's Policy includes an amendatory Turbine Engine Endorsement that sets the coverage terms for damage to the Air Tractor's engine. Doc. No. 18-2, p. 10. The endorsement begins by stating that it "applies to aircraft equipped with a turbine engine or turbine engines" covered under the Policy's Part Two - Aircraft Physical Damage section. Id. That section explains USSIC will not pay for damage to a covered aircraft "[c]aused by wear or tear, deterioration, freezing, mechanical or electrical breakdown or failure, but [USSIC] will pay for other direct physical loss or damage to your aircraft that results from any of these causes." Id. at 52. If damage to an aircraft with a turbine engine meets the initial Part Two criteria, then the Turbine Engine Endorsement imposes additional conditions for coverage. Id. at 10. As relevant here, the endorsement excludes coverage when damage results from either "breakdown, failure or malfunction of any part(s) of a turbine engine" or "improper operation of a turbine engine during any cycle or phase of its operation." Id.

Aerial Timber submitted an approximately $988,000 claim to USSIC for the damage to the Air Tractor's engine on August 21, 2019. Doc. No. 18-3, p. 5. Later that day, USSIC denied the

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claim. Id. USSIC asserted that the Turbine Engine Endorsement precluded coverage because any damage resulted from a mechanical breakdown or malfunction or from Hlavnicka improperly operating the aircraft. Doc. No. 1, ¶ 19. Aerial Timber retained counsel, who then requested claim-related documents from USSIC on October 14, 2019. Doc. No. 18-4. Retaining counsel in kind, USSIC responded to Aerial Timber's inquiry with the requested documents on November 1, 2019. Doc. No. 18-5.

On December 11, 2019, USSIC filed the present action. See Doc. No. 1. Invoking 28 U.S.C. § 2201, USSIC seeks a declaration that the Policy's Turbine Engine Endorsement bars coverage for the claim arising from the Air Tractor fire. USSIC served Aerial Timber with process on December 20, 2019. Doc. No. 6. Then on January 10, 2020, Aerial Timber instituted a separate lawsuit against USSIC in the 429th District Court of Collin County, Texas.¹ See Doc. No. 18-3. Aerial Timber's state court complaint pleads a breach of contract stemming from USSIC's denial of coverage, as well as a bevy of related claims grounded on Texas law. See id. The same day the Texas lawsuit commenced, Aerial Timber moved to dismiss or stay the proceedings in this Court. Doc. No. 18.

II. DISCUSSION

Aerial Timber's motion is twofold. First, the motion seeks dismissal of the complaint outright for either lack of standing or improper venue. Second, and alternatively, the motion requests that the Court abstain from issuing a declaratory judgment in deference to the Texas state court proceeding. The initial roadblocks the motion raises pose no bar to USSIC's complaint. Even so, the Court agrees that the circumstances call for abstention.

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A. Standing

Aerial Timber's standing argument is without merit. "Article III limits federal jurisdiction to 'Cases' and 'Controversies,' and there is no case or controversy unless the party initiating the action has standing to sue." Owner-Operator Indep. Drivers Ass'n, Inc. v. U.S. Dep't of Transp., 831 F.3d 961, 966 (8th Cir. 2016) (citing Allen v. Wright, 468 U.S. 737, 750 (1984)). The Declaratory Judgment Act directly incorporates that principle and provides, "In a case of actual controversy within its jurisdiction," a federal court "may declare the rights and other legal relations of any interested party seeking such declaration." 28 U.S.C. § 2201(a). To satisfy constitutional standing in a declaratory judgment action, a plaintiff must demonstrate the existence of "a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." Md. Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941). "The essential distinction between a declaratory judgment action and an action seeking other relief is that in the former no actual wrong need have been committed or loss have occurred in order to sustain the action." Cty. of Mille Lacs v. Benjamin, 361 F.3d 460, 464 (8th Cir. 2004) (citation omitted).

Here, a substantial controversy exists between Aerial Timber and USSIC. The parties plainly dispute coverage for the claim arising from the Air Tractor fire, which Aerial Timber values at north of $988,000. And that controversy was immediate and real at the time USSIC filed this action. See Steger v. Franco, Inc., 228 F.3d 889, 892 (8th Cir. 2000) (noting that standing is determined by the facts existing at the time suit is filed). Following the denial of coverage, Aerial Timber retained attorneys to request and review claim-related documents, clearly indicating dissension from USSIC's coverage determination. That USSIC had not paid out Aerial Timber's

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claim when suit commenced in no way diminishes the controversy. Indeed, the declaratory judgment remedy is designed for situations exactly like this one, affording litigants an opportunity to proactively ascertain their contractual obligations before incurring actual damages. See Maytag Corp. v. Int'l Union, United Auto., Aerospace & Agric. Implement Workers of Am., 687 F.3d 1076, 1081 (8th Cir. 2012). USSIC therefore meets the constitutional minimum of standing.

B. Venue

The improper venue hurdle that Aerial Timber posits is equally unpersuasive. Venue in federal court is proper in:

(1) a judicial district in which any defendant resides, if all defendants are residents of the State in which the district is located;
(2) a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated; or
(3) if there is no district in which an action may otherwise be brought as provided in this section, any judicial district in which any defendant is subject to the court's personal jurisdiction with respect to such action.

28 U.S.C. § 1391(b). In conjunction with 28 U.S.C. § 1406(a), Rule 12(b)(3) of the Federal Rules of Civil Procedure "authorize[s] dismissal only when venue is 'wrong' or 'improper' in the forum in which it was brought." Atl. Marine Constr. Co., Inc. v. U.S. Dist. Court for W. Dist. of Tex., 571 U.S. 49, 55 (2013).

Venue is manifestly proper in this district under § 1391(b)(1) because...