Sparta Insurance Company v. Carrillo
2:17-cv-00604
D.N.M.Nov 20, 2017Background
- In 2011 a Sparta‑insured truck (driven by Medina) collided with a vehicle driven by Carrillo; Carrillo sued Copper Solutions (the insured), its executive (Alderete), and Medina in New Mexico state court.
- Sparta retained defense counsel for its insureds but was not originally a party to the Carrillo action; Sparta earlier sued Copper in federal court in Texas (2014) and obtained a declaratory judgment limiting liability to $1,000,000.
- In 2016 a New Mexico jury awarded Carrillo $12,500,000 (compensatory and punitive) and the state court later awarded prejudgment interest based on findings implicating Sparta’s claims handling.
- Carrillo moved to join Sparta in the state action and alleged bad faith and related claims against the insurer; Sparta moved to intervene to oppose supplementation. Copper and Alderete separately filed a bad‑faith action against Sparta in New Mexico state court.
- Sparta filed a second federal declaratory judgment action (May 2017) seeking to resolve coverage limits and whether its pre‑ and post‑judgment conduct satisfied its obligations; defendants moved to dismiss or stay, arguing parallel state proceedings should decide the issues.
- The federal court concluded Sparta filed the federal suit to avoid adjudication of state bad‑faith claims and dismissed Sparta’s declaratory judgment complaint without prejudice, allowing Sparta to seek reinstatement only if state courts fail to resolve coverage.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the federal court should exercise discretionary DJA jurisdiction over Sparta’s declaratory action | Sparta: federal court can decide coverage first; New Mexico priority jurisdiction favors the first‑filed federal action | Defs: state proceedings already address same issues; federal action is anticipatory forum shopping | Court declined to exercise DJA jurisdiction and dismissed the federal action without prejudice |
| Whether the federal declaratory action would settle or clarify the controversy | Sparta: would resolve whether coverage limit is $1,000,000 vs $2,000,000 and whether Sparta met its duties in offers/claims handling | Defs: those issues are or can be raised and resolved in state court as part of bad‑faith/coverage disputes | Court: declaratory action would be duplicative and unnecessary; state courts can resolve contract and tort questions |
| Whether Sparta engaged in procedural fencing / forum shopping | Sparta: asserts priority and need for federal resolution | Defs: Sparta filed federal suit to avoid state bad‑faith claims and to gain tactical advantage | Court: found procedural fencing; Sparta filed to avoid state adjudication and sought a second bite after the Texas judgment |
| Whether an adequate alternative forum exists (state court) | Sparta: implied federal adjudication appropriate; invoked priority jurisdiction | Defs: state courts are adequate and pending actions encompass same issues | Court: state courts are adequate; exercising federal jurisdiction would improperly encroach on state proceedings |
Key Cases Cited
- Brillhart v. Excess Ins. Co., 316 U.S. 491 (federal courts have discretion whether to hear declaratory judgments when parallel state litigation exists)
- Wilton v. Seven Falls Co., 515 U.S. 277 (reaffirming Brillhart; district courts have substantial latitude to stay or dismiss DJA suits due to parallel state proceedings)
- State Farm Fire & Casualty Co. v. Mhoon, 31 F.3d 979 (10th Cir.) (factors to consider in exercising DJA jurisdiction)
- United States v. City of Las Cruces, 289 F.3d 1170 (10th Cir.) (discussing Brillhart/Wilton principles and parallel proceedings)
- Mid‑Continent Casualty Co. v. Village at Deer Creek Homeowners Assoc., Inc., 685 F.3d 977 (10th Cir.) (parallel state proceedings that would resolve the same issues support declining federal jurisdiction)