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Federated Mutual Insurance Co. v. Shernaman Enterprises, Inc.

United States District Court, E.D. Missouri, Eastern Division

December 2, 2014

SHERNAMAN ENTERPRISES, INC., et al., Defendants.


CHARLES A. SHAW, District Judge.

This matter is before the Court on defendants Shernaman Enterprises, Inc. ("Shernaman") and Daniel T. McCullen's (collectively "defendants") Motion to Dismiss or Stay Proceedings. Plaintiff Federated Mutual Insurance Company ("Federated") opposes the motion and it is fully briefed. For the following reasons, the defendants' motion will be granted to the extent that the Court in the exercise of its discretion will abstain from and stay this case.

I. Background

This is a declaratory judgment action. Plaintiff Federated's complaint alleges that it issued a Commercial Package Policy and a Commercial Umbrella Liability Policy (collectively the "Federated Policies") to Shernaman for the period March 1, 2006 to March 1, 2007. The case arises out of a lawsuit filed by defendant McCullen on September 22, 2011 in the Circuit Court of St. Louis County, Missouri, captioned Daniel T. McCullen v. Shernaman Enterprises, Inc., d/b/a Pro Cycle and American Honda Motor Co., Inc. ("the Underlying Suit"). The instant action was filed on February 14, 2014. The complaint seeks declarations that Federated has no obligation under either the Commercial Package Policy or the Commercial Umbrella Liability Policy to defend Shernaman in connection with the Underlying Suit, or to indemnify Shernaman in connection with any settlement or judgment in the Underlying Suit.

The Petition in the Underlying Suit alleged that McCullen sustained injuries as a result of the improper design and manufacture of a 2003 Honda motorcycle he purchased from Shernaman. The Petition alleged strict liability and negligence claims against American Honda Motor Co. ("Honda") and a negligence claim against Shernaman. Shernaman's registered agent was served with the Petition and Summons in the Underlying Suit on October 21, 2011. On November 13, 2013, Honda was dismissed from the Underlying Suit without prejudice and, on December 4, 2013, McCullen filed a motion for default against Shernaman based on its failure to timely answer. Federated alleges it first received notice of the Underlying Suit from Shernaman on January 6, 2014, and retained defense counsel to represent Shernaman and oppose the motion for default. On January 24, 2014, the state court denied Shernaman's motion for additional time to plead in response to the Petition.

Federated informed Shernaman it would defend the Underlying Suit subject to a reservation of the right to deny coverage on the grounds that Shernaman breached its obligations under the Federated Policies to provide timely notice of the Underlying Suit. Shernaman refused to accept Federated's defense under a reservation of rights and on February 1, 2014 entered into a settlement agreement (the "Settlement Agreement") with McCullen pursuant to § 537.065, Missouri Revised Statutes (2000). The Settlement Agreement includes a covenant by McCullen to limit his judgment execution rights to the coverage available under the Federated policies. The Settlement Agreement also provided that the Underlying Suit would proceed to a bench trial on all issues of liability and damages. Federated filed a motion to intervene in the Underlying Suit on February 3, 2014, and filed the instant declaratory judgment action on February 14, 2014. Federated's motion to intervene in the Underlying Suit was denied on February 19, 2014.[1]

Judgment was entered against Shernaman in the Underlying Suit on April 24, 2014. McCullen as judgment creditor filed an equitable garnishment action against Federated on May 28, 2014 in the Circuit Court for the City of St. Louis, State of Missouri, seeking coverage and the right to recover and collect on the Federated policies. In accordance with Missouri law, McCullen's equitable garnishment action was filed after the expiration of thirty days from the date of the judgment, and also named the insured, Shernaman, as a defendant. See § 379.200, Mo. Rev. Stat. (2000).

A Case Management Order was issued in this case on May 8, 2014. Discovery has taken place both in this case and the equitable garnishment action. The defendants filed the instant Motion to Dismiss or Stay Proceedings on October 3, 2014. Subsequently, on October 24, 2014 Federated filed a motion for summary judgment on the issue of late notice. According to information supplied by the parties and Missouri, [2] on November 19, 2014, the state court heard argument on McCullen's motion to compel discovery from Federated in the equitable garnishment action, and agreed to conduct an in camera review of sixty documents that Federated asserted were protected from discovery as work product, attorney-client privileged, or confidential/proprietary business information. The state court also agreed to review Federated's privilege log that listed documents Bates-labeled 1 through 876. On November 25, 2014, the parties came before this Court for a hearing on two motions to compel filed by Shernaman and McCullen. At the hearing, the parties informed the Court that the information sought by the motions to compel was also the subject of McCullen's motion to compel under submission before the state court judge.

II. The Wilton/Brillhart Standard

The Declaratory Judgment Act confers on federal courts "unique and substantial discretion in deciding whether to declare the rights of litigants." Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995). The statute provides that a court " may declare the rights and other legal relations of any interested party seeking such declaration, " id. (quoting 28 U.S.C. § 2201(a)). The Declaratory Judgment Act is "an enabling Act, which confers a discretion on the courts rather than an absolute right upon the litigant." Id. at 287 (quoting Public Serv. Comm'n of Utah v. Wycoff Co., 344 U.S. 237, 241 (1952)).

In Wilton, the Supreme Court reaffirmed the application of Brillhart v. Excess Insurance Co. of America, 316 U.S. 491 (1942), to a declaratory judgment action:

Over 50 years ago, in Brillhart..., this Court addressed circumstances virtually identical to those present in the case before us today. An insurer, anticipating a coercive suit, sought a declaration in federal court of nonliability on an insurance policy. The District Court dismissed the action in favor of a pending state garnishment proceedings, to which the insurer had been added as a defendant... [T]his Court held that, "although the District Court had jurisdiction of the suit under the Federal Declaratory Judgments Act, it was under no compulsion to exercise that jurisdiction." The Court explained that "ordinarily 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 state court presenting the same issues, not governed by federal law, between the same parties." The question for a district court presented with a suit under the Declaratory Judgment Act, the Court found, is "whether the questions in controversy between the parties to the federal suit, and which are not foreclosed under the applicable substantive law, can better be settled in the proceeding pending in the state court."

Wilton, 515 U.S. at 282 (quoting Brillhart) (internal citations and brackets omitted).

The Declaratory Judgment Act gives district courts discretion to determine whether to exercise jurisdiction in a declaratory judgment action or to abstain in favor of a parallel state court proceeding. See Capitol Indem. Corp. v. Haverfield, 218 F.3d 872, 874 (8th Cir. 2000) (citing Wilton, 515 U.S. at 289-90). The Eighth Circuit has instructed that a district court's "key consideration... is to ascertain whether the issues in controversy between the parties to the federal action... can be better settled by the state court' in light of the scope and nature of the pending state court proceeding.'" Evanston Ins. Co. v. Johns, 530 F.3d 710, 713 (8th Cir. 2008) (quoting Capitol Indemnity, 218 F.3d at 874) (citing Brillhart, 316 U.S. at 495). If the issues would be better settled in the pending state court proceeding, "the district court must dismiss the federal action because it would be uneconomical as well as vexatious for a federal court to ...

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