Century Surety Co. v. Blevins, 799 F.3d 366

Background

On May 20, 2012 a child was injured after ingesting a toxic substance found in a motel laundry area; the family sued Sohum LLC (Regency Inn) in Louisiana state court (Underlying Suit).
Century Surety issued a general-liability policy to Sohum, agreed to defend under a reservation of rights, and sent a reservation-of-rights letter citing a toxic-substance exclusion.
Century filed a federal declaratory-judgment action seeking a determination that it had no duty to defend or indemnify under the Policy.
Sohum counterclaimed in federal court for breach of contract, bad faith, estoppel, vicarious liability, and LUTPA violations; Century moved to dismiss some counts; the district court dismissed all counterclaims (some sua sponte) and then, applying abstention, dismissed the declaratory action.
On appeal the Fifth Circuit (1) reversed the dismissal of the bad-faith and three sua sponte-dismissed state-law counterclaims and remanded for reconsideration, (2) affirmed dismissal of the LUTPA claim, and (3) vacated and remanded the district court’s abstention dismissal of the declaratory judgment action in light of the remanded claims and changed state-court posture.

Issues

Issue	Plaintiff's Argument (Century or moving party)	Defendant's Argument (Sohum or opposing party)	Held
Whether Sohum’s bad-faith counterclaim properly pleaded a claim under La. R.S. § 22:1973 or other Louisiana law	Bad-faith claim fails because alleged conduct does not fit §22:1973(B)(1) misrepresentation elements	Kelly permits insureds to bring implied-covenant bad-faith claims beyond the narrow §22:1973 list; pleading may be sufficient	Reversed district court; remanded to reconsider bad-faith claim in light of Kelly
Whether Sohum’s LUTPA claim is cognizable against an insurer	LUTPA claim should be dismissed because insurance conduct is subject to insurance commissioner jurisdiction	Sohum argues private LUTPA claim remains viable	Affirmed dismissal: LUTPA does not provide a private cause of action for insurance matters under controlling state appellate authority
Whether district court properly sua sponte dismissed Sohum’s breach of contract, estoppel, and vicarious liability counterclaims without notice	Sua sponte dismissal is permitted where claims are frivolous	Court lacked notice and opportunity requirement; dismissal was unfair	Reversed: sua sponte dismissals vacated and remanded for briefing and reconsideration
Whether district court properly abstained under Brillhart/Trejo and dismissed the declaratory judgment action	Federal court should abstain because parallel state proceedings can resolve coverage issues	Federal declaratory action warranted; abstention inappropriate given posture and remanded claims	Vacated and remanded: district court must reconsider abstention and jurisdiction in light of remanded claims and Century’s joinder in state court

Key Cases Cited

Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (federal courts may decline declaratory relief when parallel state proceedings can resolve the controversy)
Wilton v. Seven Falls Co., 515 U.S. 277 (clarifies discretionary nature of federal declaratory relief)
Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (exceptional-circumstances abstention for coercive relief; federal courts normally must exercise jurisdiction)
St. Paul Ins. Co. v. Trejo, 39 F.3d 585 (5th Cir. framework for applying Brillhart factors)
Davoodi v. Austin Indep. Sch. Dist., 755 F.3d 307 (sua sponte dismissal requires notice and opportunity to respond)
New England Ins. Co. v. Barnett, 561 F.3d 392 (5th Cir. explains that Colorado River abstention applies whenever coercive relief is sought)
Kelly v. State Farm Fire & Cas. Co., 169 So.3d 328 (La. 2015) (insureds’ implied covenant bad-faith claims are not limited to acts enumerated in La. R.S. §22:1973)
Theriot v. Midland Risk Ins. Co., 694 So.2d 184 (La. 1997) (section 22:1973 created statutory cause of action for third parties against insurers)