NAUTILUS INSURANCE COMPANY, Plaintiff-Appellee,
v.
WINCHESTER HOMES, INCORPORATED, Defendant-Appellant,
RELIANCE WOOD PRESERVING, INCORPORATED; Pennsylvania
Lumbermen's Mutual Insurance Company; Great
American Insurance Company, Defendants-Appellees,
v.
Martin MULLANEY, Third Party Defendant.
No. 92-1799.
United States Court of Appeals,
Fourth Circuit.
Argued Dec. 1, 1992.
Decided Feb. 3, 1994.
ARGUED: Vernon Webster Johnson, III, Jackson & Cаmpbell, P.C., Washington, DC, for Appellant. Robert Lawrence Ferguson, Jr., Thieblot, Ryan, Martin & Ferguson, Baltimore, Maryland, for Appellees. ON BRIEF: Michael J. McManus, Jackson & Campbell, P.C., Washington, DC, for Appellant. Jodi K. Ebersole, Thieblot, Ryan, Martin & Ferguson, Baltimore, Maryland; John Hamilton Johnston, Slenker, Brandt, Jennings & Johnston, Merrifield, Virginia; Thomas J. Minton, Kathryn Miller Goldman, Quinn, Ward & Kershaw, P.A., Baltimore, Maryland, for Appellees.
Before WIDENER and PHILLIPS, Circuit Judges, and SPROUSE, Senior Circuit Judge.
OPINION
PHILLIPS, Circuit Judge:
Winchester Homes, Inc. ("Winchester"), one of several defendants in a declaratory judgment action brought to resolve a dispute over liability insurance coverage, appeals the district court's dismissal of that action, on the eve of trial, in deference to pending state court litigation against the insured on the underlying claims for which coverage is sought. The appeal raises once again the difficult question of when a federal district court may decline to entertain a declaratory judgment action that is properly within its jurisdiction because of the pendency of related litigation in the state courts. Winchester also attempts to obtain review of an earlier ruling by the district court--later vacated by that court itself--that denied in part its motion for summary judgment. Because we find that the district court erred in dismissing the declaratory judgment action, we reverse the order of dismissal and remand with instructions to reinstate the action. We decline to review the vacated ruling denying Winchester's motion for summary judgment.
I.
Reliance Wood Preserving, Inc. ("Reliance") is a Maryland corporation that was engaged, prior to its bankruptcy, in the business of producing and distributing fire retardant plywood. In 1988, Nautilus Insurance Company ("Nautilus") issued a general liability insurance policy to Reliance. The policy contained a products liability endorsement, in which Nautilus agreed to indemnify Reliance, within specified limits, for any sums the latter might become legally obligated to pay to third parties as damages for injuries to person or property caused by its products, and to defend it against any actions seeking damages for such injuries. The policy, as renewed, was in effect from July of 1988 until July of 1990.
Winchester is a Delaware cоrporation that builds townhouses and other residential properties. In November of 1990, Winchester filed two separate products liability actions--one in the Circuit Court for Montgomery County, Maryland; the other in the Circuit Court for Fairfax County, Virginia--against Reliance and 13 other entities allegedly involved in the manufacture and distribution of fire retardant plywood it had used in some townhouses it built and sold during the 1980's. In those actions, Winchester sought damages for property damage and related economic losses allegedly caused it by that plywood, which it claimed had begun to deteriorate after installation.1 After being notified of Winchester's claims, Nautilus provided Reliance with a defense against them, subject to a full reservation of its rights under the policy.
In February of 1991, some four months after Winchester's state court actions were filed, Nautilus filed this declaratory judgment action in the United States District Court for the District of Maryland. Nautilus sought a declaration that it was not obligated to defend or indemnify Reliance against the claims being asserted by Winchester in the state court actions, contending that the policy was void because of material misrepresentations and omissions made by Reliance in applying for it, and that the claims in question were in any event not within the scope of its coverage. Nautilus named as defendants in this declaratory action its policyholder Reliance, the tort clаimant Winchester, and two other insurance companies that had issued liability insurance policies to Reliance, Pennsylvania Lumbermen's Mutual Insurance Company ("PLMIC") and Great American Insurance Company ("GAIC").2 The sole basis for federal subject matter jurisdiction was diversity of citizenship. Reliance counterclaimed against Nautilus, seeking a declaration that Nautilus was required to defend and indemnify it in the state court actions, as well as damages for fraudulent misrepresentation.
On June 25, 1991, Reliance filed a petition in bankruptcy, which stayed all litigation, both federal and state, then pending against it. The Bankruptcy Court lifted the automatic stay to allow both the underlying tort actions and this declaratоry action to proceed against Reliance. Reliance elected to cease all direct participation in this case, however, and Winchester assumed its interests in it, in order to preserve its own interest in the Nautilus policy, which was the only asset in Reliance's estate in bankruptcy and thus Winchester's only hope for satisfying any judgment it might obtain against Reliance in the underlying tort actions. On April 10, 1992, Reliance's estate in bankruptcy formally assigned its interest in the Nautilus policy to Winchester.
After seven months of extensive discovery, Winchester and the three insurance companies each filed motions for summary judgment in this action. The motions were referred to a United States Magistrate Judgе, who recommended that Winchester's motion for summary judgment be granted in part, but denied with respect to Nautilus' claim that its policy was void for misrepresentation. The District Court issued an order adopting the Magistrate Judge's recommendations in their entirety, including the denial of Winchester's motion for summary judgment on the void-for-misrepresentation issue.
On April 20, 1992, one week before trial was scheduled to begin, GAIC moved to dismiss this action because of the pendency of the underlying tort actions in state court, citing our recent decision in Mitcheson v. Harris,
Winchester filed this timely appeal from the order of dismissal. GAIC, now joined by PLMIC and Nautilus, has moved to dismiss the appeal for lack of jurisdiction. We deferred ruling on that motion until oral argument on the appeal.
II.
At the outset, we must address the motion to dismiss the appeal for lack of jurisdiction. In that motion, GAIC contends that Winchester lacks standing to appeal the order dismissing the declaratory action, because it was not aggrieved by that order. It points out that Winchester was a defendant in the declaratory action, rather than a plaintiff; that it never filеd any sort of counterclaim or cross-claim seeking affirmative relief in its own behalf; and that it had in fact urged the district court, both in its answer and in a later motion for judgment on the pleadings, to dismiss it from the action. As a result, GAIC contends, Winchester was not sufficiently aggrieved by the order of dismissal to be entitled to take an appeal from it.
We disagree. It is true that Winchester has never asserted any claims for affirmative relief in its own name in this action, and that it originally sought to have itself dismissed from the action. These facts do seem at first blush to suggest that Winchester was not sufficiently aggrieved by the order of dismissal to be entitled to appeal from it. See Deposit Guaranty Nat'l Bank v. Roper,
GAIC's argument ignores the fact that Winchester's position in this lawsuit changed dramatically between the time it filed its answer and motion for judgment on the pleadings urging dismissal and the time the district court issued the order of dismissal from which it now seeks to appeal. After Reliance filed a petition in bаnkruptcy and assigned all of its rights in the Nautilus policy to Winchester, Winchester, as assignee of Reliance's rights against Nautilus, took over the prosecution of Reliance's counterclaim for a declaration that the tort claims Winchester was asserting against it were covered by the Nautilus policy. In that new capacity, Winchester abandoned its earlier effort to obtain dismissal of this case and in fact actively urged the court not to grant GAIC's motion to dismiss. The order from which Winchester now seeks to appeal dismissed not only Nautilus' request for a declaration that it had no duty to defend or indemnify Reliance, but also Reliance's countervailing request for a declaration that Nautilus did hаve such duties. Winchester, as assignee of Reliance's rights under the policy, was therefore sufficiently aggrieved by the order of dismissal to take an appeal from it.
III.
We turn now to the merits of Winchester's challenge to the district court's decision to dismiss this declaratory action. The Federal Declaratory Judgment Act gives a federal district court the power, in any "case of actual controversy within its jurisdiction," to "declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." 28 U.S.C. Sec. 2201. The district court unquestionably had the power to entertain Nautilus's declaratory judgment action, as it was a "case of actual controversy" within the court's diversity jurisdiction.3 Winchester contends that the district court erred in refusing to exercise this power, and we agree.
It has long been settled that a federal court has some measure of discretion to decline to entertain a declaratory judgment action that is otherwise properly within its jurisdiction. See, e.g., Public Affairs Assoc., Inc. v. Rickover,
Because the remedial discretion conferred by the Declaratory Judgment Act must "be liberally exercised to effectuate the purposes of the statute," Quarles,
The statute providing for declaratory judgments meets a real need and should be liberally construed to accomplish the purpose intended, i.e., to afford a speedy and inexpensive method of adjudicating legal disputes without invoking the coercive remedies of the old procedure, and to settle legal rights and remove uncertainty and insecurity from legal relationships without awaiting a violation of the rights or a disturbance of the relationships.
Applying this analysis, we have frequently approved the use of federal declaratory judgment actions to resolve disputes over liability insurance coverage, even in advance of a judgment against the insured on the underlying claim for which coverage is sought. See, e.g., Stout v. Grain Dealers Mut. Ins. Co.,
[A] liability insurer's indemnification agreement carries with it not only an obligation to pay judgments against the insured but also, in the real world, to pay settlement amounts. Indeed liability insurers owe fiduciary obligations to their insureds with respect to the consideration of settlement offers and the conduct of settlement negotiations.... The respective interests and obligations of insured and insurers, when disputed, [thus] require determination much in advance of judgment [against the insured] since they will designate the bearer of ultimate liability in the underlying cases and hence the bearer of the onus and risks of settlement.... To delay [resolution of this controversy until the underlying suit against the insured prоceeds to judgment] ... would prevent the litigants from shaping a settlement strategy and thereby avoiding unnecessary costs. [Federal] declaratory judgment relief was intended to avoid precisely the "accrual of avoidable damages to one not certain of his rights."
ACandS, Inc. v. Aetna Cas. & Sur. Co.,
In Mitcheson, we recognized that when an insurer comes to federal court seeking a declaratory judgment on coverage issues while the underlying litigation against its insured is pending in the state courts, considerations of federalism, efficiency, and comity should also figure into the discretionary balance, and may, in certain circumstances, require the federal court to refuse to entertain the action, even when the declaratory relief sought would serve a useful purpose.
Instead, Mitcheson held only that when a federal court is confronted with an insurer's request for a declaratory judgment on coverage issues during the pendency of related litigation in the state courts, its discretion must be guided not only by the criteria outlined in Quarles, which focus on the general utility of the declaratory relief sought, but also by the same considerations of federalism, efficiency, and comity that traditionally inform a federal court's discretionary decision whether to abstain from exercising jurisdiction over state-law claims in the face of parallel litigation in the state courts. See
In Mitcheson itself, consideration of these additional faсtors led us to conclude that the district court should have declined to entertain a liability insurer's action for declaratory relief on coverage issues, despite its obvious utility to the parties, because of the pendency in state court of the underlying tort action for which the insured claimed coverage. We reasoned that the state's interest in having the issues raised in the federal action decided in its own courts was "particularly strong" there, because those issues were all governed by state law, and the issues of state law presented were "close," "problematic," and "difficult[ ]." Id. at 236-40. We also thought that it would "make[ ] no sense as a matter of judicial economy" for the fedеral court to entertain the declaratory action, since there was already an action pending in state court that "stemm[ed] from the same overall controversy" and "involv[ed] overlapping issues," and the state court had the ability to resolve all issues raised in the federal declaratory action. Id. at 239. Finally, we thought that permitting the federal declaratory action to go forward might result in unnecessary "entanglement" between the federal and state court systems, because many of the issues of law and fact raised in it were already being litigated in the pending state action between the insured and the tort claimant, both of whom were also parties to the federal declaratory action. Id. at 239-40. We explained that if the federal court reached final judgment before the state court, its resolution of those common issues might be entitled to preclusive effect in the state action, which would " 'frustrate the orderly progress' of [the] state court proceedings by leaving the state court with some parts of [the] case foreclosed from further examination but still other parts in need of full scale resolution." Id. At bottom, then, Mitcheson simply applied the long-standing rule that a federal court should "[o]rdinarily" decline, for reasons of efficiency and comity, to grant declaratory relief "where another suit is pending in a state court presenting the samе issues, not governed by federal law, between the same parties." Brillhart,
In this case, a liability insurer and its insured have come to federal court seeking a declaratory judgment on coverage issues during the pendency of related state court litigation against the insured. There is no question but that the declaratory relief sought would "serve a useful purpose in clarifying and settling the legal relations in issue," and that it would "terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding." Quarles,
In the first place, we do not think there is a compelling state interest in having the particular issues raised in this federal declaratory action decided in the state courts. See Mitcheson,
In this case, unlike Mitcheson, the questions of state law raised in the federal action are not close, difficult, or problematic; instead, they involve the routine application of settled principles of law to particular disputed facts.5 Maryland's interest in having those issues decided in its own courts, which is thus no stronger than it is in any case in which a federal court has jurisdiction over a claim in which state law provides thе rule of decision, is not sufficiently compelling to weigh against the exercise of federal jurisdiction. See Continental Cas. Co. v. Robsac Indus.,
Nor do we think that the issues raised in the federal declaratory action can more efficiently be resolved in the courts in which the state actions are pending. See Mitcheson,
After examining the scope of the pending state proceedings, we cannot say with any confidence that thе issues raised in this federal declaratory action can better be resolved in those proceedings. The basic dispute here is over which of Reliance's three liability insurers--if any--is contractually obligated to defend and indemnify Reliance against Winchester's claims. That issue is not directly raised in either of the two pending state actions, which involve the entirely separate and independent question of Reliance's liability to Winchester under the tort law of two different states. Nor are all parties with interests in this coverage dispute joined as parties to the pending state proceedings: none of the three insurance companies whose policies are implicatеd in this dispute is formally a party to either of those actions. Finally, it is not clear to us that the insurers can be brought into those actions at this point. Under these circumstances, we cannot say that the issues raised in this declaratory action can more efficiently be resolved in the pending state proceedings.
That the issues raised here might be resolved in some yet-to be filed action brought in state court--either another action for declaratory relief or an action for indemnity after entry of judgment against Reliance in the underlying tort suits--is not alone sufficient to justify dismissal of this action. See 6A Moore's Federal Practice, supra, p 57.08, at 57-43. It is well-settled that the mere availability of another adequate remedy does not preclude federal declaratory relief, see Fed.R.Civ.Proc. 57, and that a federal court may properly decline to entertain a declaratory judgment action because of the availability of another adequate remedy only if it finds that the other remedy would be a "more effective or efficient" means of resolving the controversy. See 6A Moore's Federal Practice, supra, p 57.08, at 57-42 through 57-44. That is plainly not the case here. At the time the motion to dismiss this declaratory action was made, it was less than a week away from trial, and the district court had already made final decisions on the merits of a number of the claims being assеrted, which the district court conceded had "go[ne] a long way to resolving the coverage issue."6 JA 797. It is difficult to imagine a less efficient use of judicial resources than dismissing this action on the eve of its trial and requiring the parties to start over again in a different court. Under these circumstances, it cannot credibly be argued that some yet-to-be-instituted action in the state courts offers a "more effective or efficient" means of resolving the coverage issues presented here. See Provident Tradesmens,
Nor do we think that permitting this federal declaratory action to go forward would result in unnecessary "entanglement" between the federal and state court systems. Unlike Mitcheson, this is not a case where many of the issues of law and fact sought to be adjudicated in the federal declaratory action are already being litigated by the same parties in the related state court actions. As earlier noted, the basic issue sought to be resolved here is whether Nautilus, GAIC, and PLMIC are contractually obligated, under the contract law of Maryland, to defend and indemnify Reliance against Winchester's claims. The issues in the pending state сourt actions are quite different ones having to do only with whether Reliance and/or some 13 other manufacturers and distributors of fire retardant plywood are liable, under the tort law of two different states, for the losses allegedly suffered by Winchester. Cf. White,
Finally, we are satisfied that this federal declaratory action is not being used merely as a device for procedural fencing. This is not a case in which a party has raced to federal court in an effort to get certain issues that are already pending before the state courts resolved first in a more favorable forum, for the issues presented in this declaratory action are not the same as those rаised in the pending state court proceedings. Compare, e.g., Grand Trunk Western R. Co. v. Consolidated Rail Corp.,
Though the parties might have filed this declaratory action in state court, they chose to proceed in federal court instead, as they were authorized to do by 28 U.S.C. Secs. 1332 and 2201. Having done so, they are entitled to have the federal court issue the declaration of rights and duties that they seek, unless the considerations of federalism, efficiency, and comity outlined in Mitcheson are strong enough to overcome the federal policy in favor of awarding declaratory relief where it will "serve a useful purpose in clarifying and settling the legal relations in issue" and "afford relief from the uncertainty, insecurity, and controversy giving rise to the controversy." Quarles,
IV.
Though Winchester's notice of appeal referred only to the April 28, 1992 order of dismissal, Winchester now asks us to review as well the district court's earlier ruling, embodied in an order dated June 26, 1992, which denied its motion for summary judgment with rеspect to Nautilus' void-for-misrepresentation defense. We decline to do so. The district court expressly vacated the ruling in question in its later order of dismissal, and it is now a nullity. Accordingly, no appeal from it can be taken.
V.
For the foregoing reasons, we reverse the district court's dismissal of the declaratory judgment action and remand with instructions to render a declaratory judgment on the issue of insurance policy coverage.7 On remand, the district court may reconsider all pending motions and either reinstate its prior rulings on those motions or rule anew on them.
SO ORDERED.
Notes
Nautilus and the other liability insurers of the defendant manufacturers and distributors are not parties to the state court actions, and those actions do not directly raise the issue of whether those liability insurers are obligated to defend or indemnify the defendants against Winchester's claims
Martin Mullaney, the insurance agent through whom Reliance had purchased the Nautilus policy, was later brought into the suit by Reliance as a third-party defendant
A dispute between a liability insurer, its insured, and a third party with a tort claim against the insured over the extent of the insurer's responsibility for that claim is an "actual controversy" within the meaning of the federal Declaratory Judgment Act, even though the tort claimant has not yet reduced his claim against the insured to judgment. See Maryland Cas. Co. v. Pacific Coal & Oil Co.,
For this reason, the federal appellate courts have uniformly recognized that the mere pendency of a related tort action against the insured in state court does not in and of itself require a federal court to refuse an insurer's request for declaratory relief on coverage issues. See, e.g., Chamberlain v. Allstate Ins. Co.,
By way of illustration, we note that the district court was able to dispose of several of the state-law issues raised here on summary judgment, that it fully agreed with the Magistrate Judge's application of state law with resрect to those issues, and that it refused a request to certify certain other state-law issues to Maryland's highest court, on the ground that it was not "genuinely uncertain" about their resolution. Compare Mitcheson,
We are aware that there have, of course, been some developments in the state court actions in the 22 months since the district court dismissed this federal action. These developments do not affect our analysis here, however, for we review the district court's decision tо dismiss this action on the basis of the situation that confronted it at the time it made that decision, see 6A Moore's Federal Practice, supra, p 57.08[6.-1], at 57-60 (assessment of the comparative utility of alternative means of resolving dispute presented in federal declaratory action is to be made "as of the time of the hearing on the motion to dismiss"), without regard to any later developments--unless, of course, those developments are sufficient to render this entire action moot. We are satisfied that the developments in the state court actions to date have not yet rendered this coverage dispute moot
Unless, of course, any intervening events have by then wholly mooted the case. See note 6, supra