Opinion
No. C 04-3644 MHP.
February 17, 2005
MEMORANDUM AND ORDER Re: Motion to Stay
On August 27, 2004, plaintiff Evanston Insurance Company ("Evanston") filed this action seeking rescission of the professional liability insurance policy issued to defendants TIB, Inc. and Ambis Corporation dba Ambassador Insurance Services ("Ambassador") as well as reimbursement of all benefits paid under that policy. Now before the court is the motion of defendants Ambassador, TIB, and Jasbir S. Thandi to stay these proceedings pending resolution of a related state court action. Having considered the parties' arguments and for the reasons stated below, the court enters the following memorandum and order.
Unless otherwise noted, the court assumes the facts alleged in Evanston's complaint to be true for the purpose of adjudicating the instant motion.
Evanston is an insurance provider incorporated in the state of Illinois with its principal place of business in that state. Pl.'s Compl. ¶ 3. Defendants Ambassador and TIB are wholesale insurance brokerages located in Oakland, California. Pl.'s Compl. ¶¶ 4-5; Haas Decl., Exh. A (hereinafter "Scan-Vino Compl.") ¶ 2. Also named as defendants are Jasbir Thandi, the president of Ambassador and TIB; Martha McCourt, an employee or associate of Ambassador; and Scan-Vino LLC, a California limited liability company that attempted to obtain liability insurance coverage through Ambassador. Pl.'s Compl. ¶¶ 17-20; Scan-Vino Compl. ¶ 17.
The instant action arises from an application for professional liability insurance that Ambassador and TIB submitted to Evanston in June 2003. Pl.'s Compl. ¶¶ 10-11. In completing that application, TIB and Ambassador represented that they were not "aware of any circumstance or any allegations or any contentions or any incident which may result in a claim against [the corporations]." Id. ¶¶ 11, 14. On approximately June 26, 2003, Evanston issued an Insurance Agents and Brokers Professional Liability Insurance Policy that provided Ambassador and TIB with coverage for the one-year period commencing on that date (hereinafter "the Evanston Policy"). Id. ¶ 10.
Evanston now alleges that Ambassador and TIB failed to disclose potential claims that had arisen prior to the date of issuance of the Evanston Policy. Those claims are related to a commercial liability umbrella insurance policy that Scan-Vino attempted to obtain through Ambassador on approximately June 12, 2003. Id. ¶ 17. According to Evanston, Martha McCourt, acting in her capacity as an agent for Ambassador, provided Scan-Vino with a quote for a commercial liability umbrella policy issued by Lloyd's of London and purported to secure insurance coverage for Scan-Vino in the amount of $5 million. Id. ¶¶ 17-18. However, Evanston alleges that McCourt never actually obtained coverage for Scan-Vino and that the existence of a Lloyd's policy was a fiction that she invented in order to secure the Scan-Vino account. Id.
These allegedly fraudulent representations are now the subject of an action that Scan-Vino filed in San Joaquin County Superior Court on July 28, 2004, Scan-Vino LCC v. Ambis Corp., No. CV 023989 (hereinafter "the Scan-Vino action" or "the state court action"). The complaint asserts that despite their representations to the contrary, Ambassador, Thandi, McCourt, and a host of other defendants failed to procure the aforementioned commercial liability umbrella policy. See generally Scan-Vino Compl. ¶¶ 17-35. Based on those allegations, Scan-Vino asserts causes of action for breach of contract, implied indemnity, negligent procurement, negligent misrepresentation, fraud, suppression of material facts, breach of fiduciary duty, and unfair competition. Id. ¶¶ 35-117. Evanston has agreed to defend Ambassador, TIB, and Thandi against Scan-Vino's claims subject to a reservation of rights. Pl.'s Compl., Exh. D. However, Evanston is not named as a party in that action and has not sought a declaration of its rights and liabilities in state court.
On August 27, 2004, Evanston filed the instant action seeking rescission of the professional liability insurance policy that it issued to Ambassador and TIB. In its complaint, Evanston asserts that Ambassador and TIB fraudulently concealed their potential liabilities relating to the Scan-Vino account, thereby causing Evanston to issue its policy issued in reliance on those misrepresentations. Id. ¶¶ 23-24. Evanston also seeks reimbursement for the costs of defending the TIB, Ambassador, and Thandi in the Scan-Vino action and for all sums paid to settle that action or to indemnify those defendants for any judgment that might be entered against them. Id. ¶ 28.
On November 23, 2004, Ambassador, TIB, and Thandi (hereinafter "defendants") moved to stay this action pending resolution of the underlying state liability action, and Scan-Vino joined in their motion on January 10, 2004. Evanston opposes defendants' motion and urges the court to exercise its jurisdiction over this matter, which all parties concede has been established pursuant to 28 U.S.C. § 1332. The court addresses the issues raised by defendants' motion in the following memorandum and order.
LEGAL STANDARD
In Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), the Supreme Court recognized that considerations of judicial economy may warrant staying a federal action pending the resolution of concurrent state court proceedings. Id. at 813-14, 817-18. However, because federal courts have "a virtually unflagging obligation . . . to exercise the jurisdiction given them," Id. at 817 (citations omitted), the Court cautioned that stay of proceedings is justified only in "exceptional circumstances." Id. at 813 (quoting County of Allegheny v. Frank Mashuda Co., 360 U.S. 185, 188-89 (1959)). In determining whether such exceptional circumstances are present, courts have considered a number of factors, including: (1) whether the state or federal court has assumed jurisdiction over a res; (2) the relative convenience of the forums; (3) the desirability of avoiding piecemeal litigation; (4) the order in which the forums obtained jurisdiction; (5) whether state or federal law controls; and (6) whether the state proceeding is adequate to protect the parties' rights. Nakash v. Marciano, 882 F.2d 1411, 1415 (9th Cir. 1989) (citations omitted). In all cases, the party seeking the stay carries a "heavy burden" of establishing its propriety. See, e.g., Midkiff v. Tom, 702 F.2d 788, 801 (9th Cir. 1983), rev'd on other grounds, Hawaii Hous. Auth. v. Midkiff, 467 U.S. 229 (1984).
DISCUSSION
The question presented by defendants' motion is whether the proceedings in this court should be stayed pending resolution of Scan-Vino's state court action. In addressing this question, the court must first consider whether Colorado River supplies the proper legal standard for adjudicating a motion to stay an insurer's action for rescission of an insurance contract.
Defendants characterize Evanston's complaint as a declaratory judgment action. If this characterization were correct, the adjudication of the instant motion would be governed by the discretionary standard set forth in Brillhart v. Excess Insurance Co. of America, 316 U.S. 491 (1942). See Wilton v. Seven Falls Co., 515 U.S. 277, 289-90 (1995) (holding that theBrillhart standard controls a district court's decision to stay a purely declaratory judgment action during the pendency of parallel state court proceedings). However, on its face, Evanston's complaint seeks rescission and reimbursement rather than declaratory relief. As the Ninth Circuit observed in First State Insurance Co. v. Callan Associates, Inc., 113 F.3d 161 (9th Cir. 1997), "[a]n action to rescind an insurance contract is distinct from an action merely to interpret [that] contract."Id. at 163 (citing Home Ins. Co. v. Townsend, 22 F.3d 91, 92 (5th Cir. 1994)). For that reason, the First State court held that district courts must apply Colorado River's "exceptional circumstances" standard rather than the discretionary standard announced in Brillhart in determining whether to stay an insurer's rescission action in deference to concurrent state court proceedings. See id. Being bound by that holding, this court must resolve defendants' motion to stay by reference to the considerations set forth in Colorado River.
While the Colorado River standard typically requires courts to balance their obligation to exercise jurisdiction against the above-listed factors counseling against that exercise, 424 U.S. at 818-19, yet another threshold issue must be addressed before applying those factors here. In Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), the Supreme Court implied that Colorado River abstention is appropriate only where the federal action is "parallel" to litigation brought in state court. Id. at 13. Although some appellate courts have interpreted this statement to limit the application of Colorado River to proceedings involving identical parties and issues,see RepublicBank Dallas, Nat'l Assoc. v. McIntosh, 828 F.2d 1120, 1121 (5th Cir. 1987) (per curiam); Crawley v. Hamilton County Comm'rs, 744 F.2d 28, 31 (6th Cir. 1984), the Ninth Circuit has adopted a more relaxed standard, requiring only that the parties and claims at issue in the two proceedings be "substantially similar." Nakash, 882 F.2d at 1416 (noting that "exact parallelism" of the parties and claims in the two proceedings is not required); see also Holder v. Holder, 305 F.3d 854, 867 (9th Cir. 2002).
"Substantially similar" does not mean different, however. Here, the two actions involve different parties. As noted above, Evanston has chosen not to seek a declaration of its rights in the state court action and is not a party to that suit. Thus, the sole plaintiff in this action is absent from the state court proceedings. In addition, although it is true that some of the allegations in the state and federal complaints overlap, the claims in the two actions are distinct. In the former, Scan-Vino asserts a host of contract and tort claims arising from Ambassador's allegedly fraudulent representation that it had procured umbrella liability insurance coverage on Scan Vino's behalf. In contrast, the federal action arises from a separate misrepresentation that defendants allegedly made in their application for professional liability insurance and involves claims for rescission and reimbursement. Simply put, the two actions at issue here involve substantially different parties and claims.
The court also notes that Colorado River's requirement of "parallel" state court proceedings "implies that those proceedings are sufficiently similar to the federal proceedings to provide relief for all of the parties' claims." Intel Corp. v. Advanced Micro Devices, Inc., 12 F.3d 908, 913 n. 4 (9th Cir. 1993) (citing Nakash, 882 F.2d at 1416), cert. denied, 512 U.S. 1205 (1994). Defendants fail to explain how the resolution of Scan-Vino's state court claims would relieve Evanston of the burden of defending and indemnifying Ambassador and TIB. Thus, the relief that Evanston seeks in this court is unavailable in the state court action.
Rather than addressing the differences between the two actions or attempting to distinguish the pertinent case law, defendants focus on the prejudice that they would purportedly suffer if they are forced to defend themselves in multiple fora. However, the fact that defendants' alleged misconduct may have injured their insurance provider as well as one of their customers in no way implies that all claims related to that misconduct must be adjudicated in the same forum. Accord England v. Louisiana State Bd. of Med. Exam'rs, 375 U.S. 411, 415 (1964) ("The right of a party plaintiff to choose a Federal court where there is a choice cannot be properly denied.") (citation omitted). In light of this fact, and considering the substantial differences between the parties and claims in the this action and those in the related state court proceedings, the court holds that staying the proceedings before it is inappropriate under the principles announced in Colorado River. CONCLUSION
For the reasons stated above, the court DENIES defendants' motion to stay.
IT IS SO ORDERED.