338 F. Supp. 3d 1227
D.N.M.2018Background
- Former employees sued Kelly's Brew Pub in New Mexico state court alleging violations of the City of Albuquerque Minimum Wage Ordinance (MWO) for withheld tips, unpaid tipped minimum wage, and recordkeeping failures (Atyani; Frank). Frank was later dismissed with prejudice; Atyani remains pending.
- Insurers West American and Peerless issued liability policies to DB Brewery LLC d/b/a Kelly's Brew Pub covering bodily injury and property damage caused by an "occurrence," with exclusions for expected or intended injury.
- Kelly's Defendants sought defense costs and indemnity under those policies for the MWO suits; insurers denied coverage, arguing the MWO claims do not allege bodily injury or property damage and are otherwise excluded.
- Insurers filed this federal declaratory-judgment action under diversity jurisdiction to determine coverage; Kelly's Defendants moved to dismiss, arguing the federal court should decline jurisdiction because factual development in the state Atyani case could resolve coverage questions.
- The district court applied the Tenth Circuit’s five-factor Mhoon test and concluded that (1) the state case will not resolve the insurers’ coverage dispute because insurers are not parties there and coverage is not at issue; (2) declaratory relief will clarify legal relations without creating improper forum shopping or undue friction with the state court; and (3) federal jurisdiction should be exercised. The motion to dismiss was denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether federal court should exercise jurisdiction over insurers' declaratory-judgment action | Insurers: federal declaratory relief is appropriate because insurers are not parties in state case and coverage is not addressed there | Kelly's Defendants: court should defer to state court until facts develop in Atyani that may determine coverage | Court: exercised jurisdiction; denied motion to dismiss (Mhoon factors favor federal action) |
| Whether a declaratory judgment will settle/clarify the controversy | Insurers: a federal judgment will immediately clarify insurers’ duties and is required because state action won't address coverage | Kelly's Defendants: factual development in state case could obviate need for separate coverage suit | Court: federal judgment will clarify legal relations; state case won’t resolve coverage because insurers are not parties |
| Whether plaintiffs engaged in procedural fencing | Insurers: filed appropriately to resolve coverage | Kelly's Defendants: insurers filed to avoid factual development and to "race" the state case | Court: no evidence of bad-faith procedural fencing; timing alone insufficient to bar federal relief |
| Whether fact-dependent coverage issues must await the state trial | Insurers: contractual interpretation can be decided in federal court without impairing state proceedings | Kelly's Defendants: New Mexico precedent suggests fact-based coverage questions should be decided in the underlying action | Court: not all fact-dependent coverage issues must await state court, especially when coverage is not raised there; federal resolution will not unduly interfere |
Key Cases Cited
- Wilton v. Seven Falls Co., 515 U.S. 277 (discretionary nature of Declaratory Judgment Act)
- Pub. Serv. Comm'n of Utah v. Wycoff Co., 344 U.S. 237 (Declaratory Judgment Act confers discretion on courts)
- W. Cas. & Surety Co. v. Teel, 391 F.2d 764 (10th Cir.) (insurer declaratory actions are a prime use of the Act)
- Farmers Alliance Mut. Ins. Co. v. Jones, 570 F.2d 1384 (10th Cir.) (Act provides forum for insurers)
- State Farm Fire & Cas. Co. v. Mhoon, 31 F.3d 979 (10th Cir.) (five-factor test for exercising jurisdiction in parallel state actions)
- United States v. City of Las Cruces, 289 F.3d 1170 (10th Cir.) (Mhoon factors balanced; none dispositive)
- Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (federal court should avoid duplicative proceedings that vex state courts)
- Kunkel v. Cont'l Cas. Co., 866 F.2d 1269 (10th Cir.) (district court may resolve coverage limits in federal declaratory action)
- St. Paul Fire & Marine Ins. Co. v. Runyon, 53 F.3d 1167 (10th Cir.) (procedural-fencing example where timing suggested bad faith)