Woodstock Resort Corp. v. Scottsdale Ins. Co.

• Decision Date: 22 December 1995
• Docket Number: No. 2:95-cv-148.,2:95-cv-148.
• Citation: 921 F. Supp. 1202
• Parties: WOODSTOCK RESORT CORPORATION, Plaintiff v. SCOTTSDALE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Vermont

921 F. Supp. 1202

WOODSTOCK RESORT CORPORATION, Plaintiff v. SCOTTSDALE INSURANCE COMPANY, Defendant.

No. 2:95-cv-148.

United States District Court, D. Vermont.

December 22, 1995.

John Paul Faignant, Miller & Faignant, P.C., Rutland, VT, for plaintiff.

Karen McAndrew, Dinse, Erdmann, Knapp & McAndrew, Burlington, VT, for defendant.

OPINION AND ORDER

SESSIONS, District Judge.

This is a declaratory judgment action. Woodstock Resort Corporation ("Woodstock") asks this Court to declare that Scottsdale Insurance Company ("Scottsdale") has a duty to defend under the terms of a policy of insurance issued by it to Woodstock. Scottsdale has moved this Court to dismiss the action for lack of subject matter jurisdiction, or, in the alternative, to abstain from deciding the issue of insurance coverage in federal court. Woodstock has moved to amend its complaint to allege diversity of citizenship as the basis for jurisdiction. This order addresses Scottsdale's motion to dismiss, Woodstock's motion to amend having been granted by separate order (paper 12).¹

I. BACKGROUND

The pleadings in this case reveal the following facts. In August, 1991, Clement, a former Woodstock employee, sued Woodstock in Windsor Superior Court in Woodstock, Vermont. The complaint, arising out of Clement's discharge from employment, alleged breach of contract, intentional infliction of emotional distress, and violation of public policy, and sought exemplary damages.

Woodstock tendered this complaint to Scottsdale, its insurer on a general liability policy. Scottsdale declined coverage on the grounds that the allegations did not satisfy the policy's definition of occurrence; that the damages claimed did not satisfy the policy's definitions of injury or damage; and that the policy did not extend coverage for wrongful termination. Woodstock brought this action, seeking a judgment that Scottsdale was required, under the terms of its insurance policy, to defend Woodstock against the underlying complaint. Scottsdale then moved to dismiss.

II. SECTION 1332(C) JURISDICTION

Section 1332(c) of Title 28, which for the purposes of federal court diversity jurisdiction treats a corporation as a citizen "of any State by which it has been incorporated and of the State where it has its principal place of business," contains the following proviso:

In any direct action against the insurer of a policy or contract of liability insurance, whether incorporated or unincorporated, to which action the insured is not joined as a party-defendant, such insurer shall be deemed a citizen of the State of which the insured is a citizen, as well as of any State by which the insurer has been incorporated and of the State where it has its principal place of business ...

28 U.S.C. § 1332(c)(1). Congress enacted the proviso "to eliminate under the diversity jurisdiction of the U.S. district courts, suits on certain tort claims in which both parties are local residents, but which, under a State `direct action' statute, may be brought directly against a foreign insurance carrier without joining the local tort-feasor as a defendant." Northbrook National Insurance Co. v. Brewer, 493 U.S. 6, 10, 110 S.Ct. 297, 299, 107 L.Ed.2d 223 (1989) (citing U.S.Code Cong. & Admin.News 1964, pp. 2778-2779).

Woodstock has amended its complaint to allege diversity of citizenship between itself and Scottsdale under 28 U.S.C. § 1332(c)(1). Scottsdale has suggested that the "direct action" proviso in § 1332(c)(1) applies to situations in which insureds bring suit against their own insurance companies, and that therefore Woodstock's claim of diversity jurisdiction is defeated.

One published opinion in this circuit which has dealt squarely with this contention held that the § 1332(c)(1) proviso did not apply to a suit brought by an insured against his own insurer. Mazzuka v. SMA Life Assurance Co., 726 F.Supp. 1400 (E.D.N.Y.1990). The Second Circuit, moreover, has held in dicta that:

Because the § 1332(c) proviso is applicable when the insurer stands in the shoes of its legally responsible insured, who would traditionally be a defendant, the general rule is that the proviso does not affect suits against the insurer based on its independent wrongs: such as actions brought against the insurer ... by the insured for failure to pay policy benefits ...

Rosa v. Allstate Insurance Co., 981 F.2d 669, 675 (2d Cir.1992). Accord Bowers v. Continental Insurance Co., 753 F.2d 1574 (11th Cir.), cert. denied, 473 U.S. 906, 105 S.Ct. 3531, 87 L.Ed.2d 655 (1985); Hayes v. Allstate Insurance Co., 722 F.2d 1332 (7th Cir. 1983); Velez v. Crown Life Insurance Co., 599 F.2d 471 (1st Cir.1979). See generally 13B Charles A. Wright, Arthur R. Miller, Edward H. Cooper, Federal Practice and Procedure § 3629, at 674-75 (1984).

Since Woodstock is bringing an action against its own insurer for refusing to defend or provide coverage for a claim made against it, the Court concludes that the suit is not a "direct action" as that term has been employed in 28 U.S.C. § 1332. Scottsdale is deemed to be a citizen of its state of incorporation and the state in which it has its principal place of business. Diversity therefore exists, and Scottsdale's motion to dismiss for lack of jurisdiction over the subject matter is denied.

III. ABSTENTION

Scottsdale seeks in the alternative for the Court to exercise its discretion under the Declaratory Judgment Act to abstain from deciding this case, on the ground that the issue is one of state law which is amenable to resolution by a state court.

28 U.S.C. § 2201(a) provides that "in a case of actual controversy within its jurisdiction, ... any court of the United States, upon the filing of an appropriate pleading, 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." The United States Supreme Court has recently reaffirmed that this statute confers on federal courts "unique and substantial discretion in deciding whether to declare the rights of litigants." Wilton v. Seven Falls Co., ___ U.S. ___, ___, 115 S.Ct. 2137, 2142, 132 L.Ed.2d 214 (1995).

In Wilton, underwriters' federal declaratory judgment action seeking a ruling that their commercial liability insurance policies provided no coverage was appropriately stayed during parallel state court proceedings. The Court stressed that "in the declaratory judgment context, the normal principle that federal courts should adjudicate claims within their jurisdiction yields to considerations of practicality and wise judicial administration." ___ U.S. at ___, 115 S.Ct. at 2143.

The exercise of this Court's discretion is governed by the standard set forth in Brillhart v. Excess Insurance Co. of America, 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942), rather than the "exceptional circumstances" test set forth in Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). Wilton, ___ U.S. at ___, 115 S.Ct. at 2142.

Brillhart involved a suit for declaratory judgment to determine rights under a reinsurance agreement. A garnishment proceeding was pending in state court at the time, in which the plaintiff sought to recover on a default judgment obtained against the defendant's insured. In that case, the Court ruled that

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.

316 U.S. at 495, 62 S.Ct. at 1175-76.

In deciding whether to dismiss a declaratory judgment action the Court should consider whether the issues in the federal suit could be better settled in the pending state suit. It may examine the nature and scope of the pending state court proceeding; whether the claims of all parties can be adjudicated there; whether all necessary parties have been joined; or whether such parties are amenable to process. Id.

Without attempting a comprehensive investigation of the pending state suit, this Court notes that Scottsdale is not a party to the pending state court proceeding, and none of the claims in the state matter involve a declaration of rights under the insurance policy. It would appear that the issues presented in this federal suit would not be better adjudicated in the pending state suit.

Scottsdale has urged as grounds for abstention that the issue is one of distinctly state law amenable to resolution by a state court, and that the federal court interpreting Vermont law has extended coverage and the duty to defend further than the Vermont Supreme Court has been willing to reach.

The leading case involving abstention in diversity cases in which the applicable state law is unsettled is Meredith v. City of Winter Haven, 320 U.S. 228, 64 S.Ct. 7, 88 L.Ed. 9 (1943). See 17A Wright, Miller & Cooper, Federal Practice and Procedure § 4246 (1988). In the Meredith case, petitioners, invoking diversity jurisdiction, sought an injunction against a municipality. The court of appeals found that the applicable state law was not clearly settled or stable, and concluded that the petitioners should be required to proceed in the state courts.

The United States Supreme Court disagreed:

We are of opinion that the difficulties of ascertaining what the state courts may hereafter determine the state law to be do not in themselves afford a sufficient ground for a federal court to decline to exercise its jurisdiction to decide a case which is properly brought to it for decision.

The diversity jurisdiction was not conferred for the benefit of the federal courts or to serve their convenience. Its purpose was generally to afford to suitors an opportunity in such cases, at their option, to assert their rights in the

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