Opinion
Case No. 3:02CV7241.
May 21, 2004
ORDER
Pending is supplemental defendant Executive Risk Indemnity Inc.'s [hereinafter "ERII"] motion to dismiss or in the alternative to stay or abstain from further proceedings with regard to plaintiff's amended supplemental complaint. (Doc. 109.) For the reasons set forth below, the motion will be denied.
The instant action, filed by plaintiff DeNune as the appointed receiver for TPSS Acquisition Corp., names several defendants and claims certain fraud-based causes of action based on the alleged looting, prior to TPSS entering into receivership, of TPSS by the individual and corporate defendants.
DeNune reached a settlement with one defendant, Carl Casareto, in October, 2003. One of the conditions precedent to the settlement becoming effective was that the settling parties seek and obtain a determination, in this Court, that the settlement was in "good faith" as provided by California law. Given the lack of a basis in law for requesting this "good faith" determination under California law, this Court denied the "application" without prejudice to plaintiff seeking to renew the request based upon Ohio law, if any. DeNune did not seek to renew his request under Ohio law. However, he did receive approval from the receivership court for the settlement, and has a final judgment in this court against Mr. Casareto. DeNune then filed a supplemental complaint, naming ERII as the liability insurer of the individual defendants as officers/directors of Consolidated Capital of North America, Inc., in order to enforce the judgment.
Further, there is an assignment by and between Casareto and DeNune as to any claim for insurance coverage under the policy underwritten by ERII.
Prior to this settlement, however, in May, 2003, ERII filed a declaratory action in California state court, seeking a determination as to whether it is liable for coverage for the defendants in this action. DeNune has resisted efforts to bring him, as receiver of TPSS, into the declaratory action in California, and did not condition the Casareto settlement/assignment on Casareto's continued involvement in the declaratory action. Thus, DeNune is claiming that any judgment reached in that action will not be binding on him, as receiver, or on Casareto, in the instant case.
In April, 2004, ERII dismissed its declaratory insurance coverage action against all defendants except Casareto. Also, at about the same time, DeNune dismissed his claims for liability against all remaining defendants. Thus, in the California state court action, the only claim pending is the insurance coverage question as to Casareto. In this court, the only claim pending is the claim in the amended complaint against ERII seeking to enforce/collect the judgment DeNune has obtained against Casareto by settlement. The issues in these two actions are substantially the same.
ERII now seeks an order from this Court dismissing the amended supplemental complaint as premature, or, in the alternative, an order either abstaining from or staying the amended supplemental complaint in this case, in order to permit the declaratory action to proceed in California state court.
STANDARD OF REVIEW
No complaint shall be dismissed unless the plaintiff has failed to allege facts in support of plaintiff's claim that, construed in plaintiff's favor, would entitle the plaintiff to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). When deciding a motion brought pursuant to Fed.R.Civ.P. 12(b)(6), the inquiry is essentially limited to the content of the complaint, although matters of public record, orders, items appearing in the record, and attached exhibits also may be taken into account. See Yanacos v. Lake County, 953 F. Supp. 187, 191 (N.D.Ohio 1996). The court must accept all the allegations stated in the complaint as true, Hishon v. King Spalding, 467 U.S. 69, 73 (1984), while viewing the complaint in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). A court, however, is "not bound to accept as true a legal conclusion couched as a factual allegation." Papasan v. Allain, 478 U.S. 265, 286 (1986).
DISCUSSION I. Standing
ERII's first contention is that this court should dismiss the supplemental complaint because DeNune lacks standing to proceed on the settlement as a matter of law. ERII's primary arguments are that the judgment is not final as a matter of law, and that the parties have failed to obtain a "good faith determination" as required by the settlement agreement. In support of ERII's arguments, it cites extremely broad, basic black letter law standing for the proposition that one cannot sue on rights it does not yet possess. While that is certainly true, it is irrelevant to the instant motion, and none of the case law cited by ERII requires dismissal of the amended complaint against ERII.
First, DeNune has a final judgment, entered in this court, against Casareto, for a sum certain. DeNune received authorization from the receivership court to enter into the settlement that precipitated the judgment. That judgment is final, and enforceable. See, e.g., Blakely v. United States, 276 F.3d 853, 866 (6th Cir. 2002) (consent judgment, freely negotiated by parties, is a final judgment). DeNune seeks to establish that he can enforce that judgment against ERII, as Casareto's insurer under a breach of contract claim. The complaint against ERII does not prove that fact conclusively; it is merely an allegation that DeNune will seek to prove at a later stage of these proceedings.
Second, whether coverage exists, whether that coverage will apply to the settlement at issue, and whether ERII has breached its insurance contract by not paying the settlement, are not issues capable of being decided by a Rule 12(b) motion. As stated above, the factual allegations in the amended complaint are to be taken as true at this stage. While it may very well be that ERII can avoid paying the judgment based on an interpretation of substantive contractual provisions in the settlement, DeNune is entitled, based on well-pleaded factual allegations, to seek to establish ERII's liability as insurer. Contract interpretation is inappropriate for a motion to dismiss.
It cannot be said that there is no set of facts that would entitle DeNune to relief on his allegation that his settlement with Casareto is enforceable against ERII. Therefore, I will deny the motion to dismiss as to the standing issue.
II. Colorado River Abstention
ERII next argues that this court should abstain from deciding the claims asserted in the amended complaint against it, as the insurance coverage issue is before a state court in California, in order to avoid duplicative litigation. DeNune argues that abstention does not apply, mainly because of the procedural history of the instant case.
I note that the instant action is not a declaratory judgment, which would require application of a more lenient abstention doctrine under Wilton v. Seven Falls Co., 515 U.S. 277 (1995).
In Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), the Supreme Court decided that a federal district court, in limited circumstances, may abstain from deciding (i.e., dismiss) a claim or an action, if "considerations of wise judicial administration" so required. In that case, the state of Colorado had enacted legislation which divided the state into seven water districts, each of which established a procedure for settling water claims in the district. The United States sued in federal district court, asserting certain reserved water rights for itself and for certain Indian tribes, as well as rights based on state law. It had, however, been involved in previous proceedings in other water districts, in state court.
Several defendants then filed a motion to dismiss the federal action, which the district court granted, on the basis that the doctrine of abstention required deference to the proceedings in another district. On appeal, the Supreme Court found that dismissal was proper, holding as follows:
[T]here are principles unrelated to considerations of proper constitutional adjudication and regard for federal-state relations which govern in situations involving the contemporaneous exercise of concurrent jurisdictions, either by federal courts or by state and federal courts. These principles rest on considerations of wise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation. Generally, as between state and federal courts, the rule is that the pendency of an action in the state court is no bar to proceedings concerning the same matter in the federal court having jurisdiction. As between federal district courts, however, though no precise rule has evolved, the general principle is to avoid duplicative litigation. This difference in general approach between state-federal concurrent jurisdiction and wholly federal concurrent jurisdiction stems from the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them. Given this obligation, and the absence of weightier considerations of constitutional adjudication and state-federal relations, the circumstances permitting the dismissal of a federal suit due to the presence of a concurrent state proceeding for reasons of wise judicial administration are considerably more limited than the circumstances appropriate for abstention. The former circumstances, though exceptional, do nevertheless exist.
It has been held, for example, that the court first assuming jurisdiction over property may exercise that jurisdiction to the exclusion of other courts. . . . In assessing the appropriateness of dismissal in the event of an exercise of concurrent jurisdiction, a federal court may also consider such factors as the inconvenience of the federal forum; the desirability of avoiding piecemeal litigation; and the order in which jurisdiction was obtained by the concurrent forums. No one factor is necessarily determinative; a carefully considered judgment taking into account both the obligation to exercise jurisdiction and the combination of factors counseling against that exercise is required. Only the clearest of justifications will warrant dismissal.Colorado River, 424 U.S. at 817-19 (citations omitted).
Federal courts have a "virtually unflagging" obligation to decide cases before it, unless "considerations of wise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation" overcome this "strong presumption," and then only in "exceptional circumstances where the order to the parties to repair to the state court would clearly serve an important countervailing interest." Id. at 813. As the Supreme Court clarified, while there will be times when a federal court should abstain from exercising jurisdiction over a particular case, such abstention is the exception, not the rule. Id. at 813-14 ("[T]he doctrine of abstention, under which a District Court may decline to exercise or postpone the exercise of its jurisdiction, is an extraordinary and narrow exception to the duty of the District court to adjudicate a controversy properly before it.").
The first step in determining whether the Colorado River doctrine is appropriate in this case is deciding if there is a "parallel" state court proceeding. See Inrecon LLC v. Highlands Ins. Co., 284 F. Supp.2d 773, 778 (E.D. Mich. 2003) (citing LaDuke v. Burlington Northern Railroad Co., 879 F.2d 1556, 1558 (7th Cir. 1989)).
In the instant case, it is important to note that the parties are distinct in this action and the California state action. See Inrecon, 284 F. Supp.2d at 778 (first indication that proceedings are not parallel is if the parties are distinct, citing Trent v. Dial Medical, 33 F.3d 217, 223 (3rd Cir. 1994); Woods Corporate Assocs. v. Signet Star Holdings Inc., 910 F. Supp. 1019, 1027 (D.N.J. 1995)). Here, Casareto is no longer a party to the instant action, and DeNune is not a party to the California state action.
Further, while there are certainly similarities in the actions here and in California, they are not identical. DeNune is seeking to enforce/collect on a judgment he obtained against Casareto, by suing ERII, Casareto's insurance company under a breach of contract theory. However, ERII is seeking a declaratory judgment that insurance coverage does not cover Casareto. While possibly related, these two issues fall short of being "parallel." See, e.g., Diamond Offshore Co. v. AB Builders, Inc., 302 F.3d 531, 540 (5th Cir. 2002) (declaratory judgment action and breach of contract action not "parallel" for purposes of Colorado River abstention). Thus, I conclude that there is no "parallel" state court proceeding
However, even if I were to assume that there is a parallel state court proceeding, I would still find that the Colorado River doctrine factors do not weigh in favor of abstaining from my duty to adjudicate the instant controversy. As the Supreme Court stated in Colorado River, "[g]enerally, as between state and federal courts, the rule is that the pendency of an action in the state court is no bar to proceedings concerning the same matter in the federal court having jurisdiction." Colorado River, 424 U.S. at 817 (internal citations omitted).
While there are several factors to weigh in determining whether to abstain under Colorado River, it is imperative to note, "the decision whether to dismiss a federal action because of parallel state-court litigation does not rest on a mechanical checklist, but on a careful balancing of the important factors as they apply in a given case, with the balance heavily weighted in favor of the exercise of jurisdiction." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16 (1983) (emphasis added). The factors to weigh are:
(1) whether the state court has assumed jurisdiction over any res or property; (2) whether the federal forum is less convenient to the parties; (3) avoidance of piecemeal litigation; . . . (4) the order in which jurisdiction was obtained[;] . . . (5) whether the source of governing law is state or federal; (6) the adequacy of the state-court action to protect the federal plaintiff's rights; (7) the relative progress of the state and federal proceedings; and (8) the presence or absence of concurrent jurisdiction.Great Earth Co. v. Simons, 288 F.3d 878, 886 (6th Cir. 2002) (quoting PaineWebber, Inc. v. Cohen, 276 F.3d 197, 206 (6th Cir. 2001), which compiled factors discussed in Supreme Court cases)); see also Heitmanis v. Austin, 899 F.2d 521, 527 (6th Cir. 1990); Inrecon, 284 F. Supp.2d at 779. The first factor does not apply in this case; there is no res or property at issue, only insurance coverage.
The second factor cuts both ways as it is equally inconvenient for DeNune, an Ohio resident acting as Receiver for TPSS, to litigate in California, as it is for ERII, a New Jersey insurance company, to litigate in Ohio. This factor does not weigh heavily in the balance either way.
As to the third factor, the concern over piecemeal litigation actually weighs against abstention. The liability case began here in Ohio, and the settlement of the liability case enabled the entry of a judgment in this court. The entry of the judgment precipitated the need for enforcement of the judgment, a job which is best suited to the court entering the judgment. Knowing that the liability suit was already in this court, ERII could have chosen to ask this court to adjudicate its declaratory judgment action, but chose instead to file suit in California. DeNune's filing of the liability suit in this court has never been questioned by ERII — it has not suggested that the liability suit belonged, somehow, in California. Thus, ERII's argument that the issue of enforcement of the judgment resulting from the liability suit, or of the assignment of Casareto's claims against ERII, does not belong in this court is not well-taken. Encouraging piecemeal litigation would be the result if this court were to abstain, rather than the other way around. Thus, this factor weighs heavily against abstention.
As to the fourth factor, it is important to note that the proceedings in this court were commenced first, and thus, this court obtained jurisdiction over this dispute prior to the California court obtaining jurisdiction. While "priority should not be measured exclusively by which complaint was filed first, but rather in terms of how much progress has been made in the two actions," Cone, 460 U.S. at 21, this case has proceeded from the initial liability case to judgment. Although the California court has denied a motion to dismiss or stay ERII's declaratory action, that suit appears to be no further along than this action. Certainly discovery accomplished or underway in that case can be used in this case. Thus, this factor does not weigh heavily in favor of granting abstention.
As to the fifth factor, there is no federal question involved in the dispute between DeNune/Casareto and ERII. The dispute between the parties is whether ERII must pay a judgment entered against Casareto as his insurer — purely a state law issue. This factor weighs in favor of abstention.
As to the sixth factor, the only "federal right" arguably at issue is DeNune's right, as Receiver of TPSS and plaintiff in this case, to be able to enforce the judgment he has obtained in this court. Any declaratory judgment by the California state court would not affect DeNune's federal rights in this court. This factor weighs, if at all, against abstention.
As to the seventh factor, as discussed above, there does not appear to be a large disparity as to the progress here and in the California state court. Thus, this factor does not weigh heavily in favor of abstention.
And finally, the presence of concurrent jurisdiction, only marginally, if at all, supports abstention. It does not, in an of itself, negate the strong presumption against abstention. Cone, 460 U.S. at 25.
In summary, most of the factors above are either neutral or only marginally support abstention, except for the avoidance of piecemeal litigation, which weighs heavily against abstention. On balance, the factors do not weigh heavily in favor of abstention.
Further, considerations beyond the "mechanical checklist" do not counsel heavily in favor of abstention. The issue of enforcing the judgment/assignment, as it relates to the disputed insurance coverage, is a relatively simple one. ERII has not offered any other factors or reasons that this court should appropriately consider for purposes of this abstention motion.
Based upon the foregoing, this is not the extraordinary case wherein the considerations counsel retreat from the strong presumption that I should exercise jurisdiction over the case before me. I will therefore deny ERII's motion for Colorado River abstention.
III. Stay
ERII argues, alternatively, that if the court determines that Colorado River abstention does not apply, the court should nevertheless stay the current action in favor of the California state action. The problem with this argument is that a stay would be, in effect, an abstention:
The Hospital argues that the Colorado River test is somehow inapplicable because in this case the District Court merely stayed the federal litigation rather than dismissing the suit outright, as in Colorado River. It contends that Mercury remains free to seek to reopen the federal suit on a showing that the state suit has failed to adjudicate its rights, and that a stay is less onerous than a dismissal. We have already rejected this distinction, for purposes of this case, in discussing appellate jurisdiction. Supra, at 935. We reject it in this context for the same reasons.
We have no occasion in this case to decide whether a dismissal or a stay should ordinarily be the preferred course of action when a district court properly finds that Colorado River counsels in favor of deferring to a parallel state-court suit. We can say, however, that a stay is as much a refusal to exercise federal jurisdiction as a dismissal. When a district court decides to dismiss or stay under Colorado River, it presumably concludes that the parallel state-court litigation will be an adequate vehicle for the complete and prompt resolution of the issues between the parties. If there is any substantial doubt as to this, it would be a serious abuse of discretion to grant the stay or dismissal at all. See supra, at Part IV D; McNeese v. Board of Education, 373 U.S. 668, 674-76 (1963). Thus, the decision to invoke Colorado River necessarily contemplates that the federal court will have nothing further to do in resolving any substantive part of the case, whether it stays or dismisses. See 17 C. Wright, A. Miller E. Cooper, Federal Practice and Procedure § 4247, at 517-519 (1978).Cone, 460 U.S. at 27-28 If there is no legal basis for abstention, it follows that there is no legal basis for a stay.
Invoking the court's inherent authority to control its docket does not benefit ERII, as the court cannot simply overrule the "strong presumption" to decide the cases before it. A review of the case law shows no court has addressed Colorado River abstention, found it inappropriate, but then resorted to its inherent authority to stay the case. I will decline ERII's invitation to be the first.
Because ERII has not cited any legal doctrine that would permit this court to ignore the strictures of Colorado River in favor of a stay, the court will deny the motion for a stay as well.
CONCLUSION
It is therefore
ORDERED THAT ERII's motion to dismiss or in the alternative, for a stay, be and hereby is denied.