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Continental Casualty Co. v. Robsac Industries

filed: October 25, 1991.

CONTINENTAL CASUALTY COMPANY, PLAINTIFF-COUNTER- DEFENDANT-APPELLEE,
v.
ROBSAC INDUSTRIES, DEFENDANT-COUNTER-CLAIMANT-APPELLANT



Appeal from the United States District Court for the Central District of California. D.C. No. CV-88-6078-RG. Richard A. Gadbois, Jr., District Judge, Presiding.

Stephen Reinhardt, Cynthia Holcomb Hall and Edward Leavy,*fn* Circuit Judges. Opinion by Judge Reinhardt; Dissent by Judge Hall.

Author: Reinhardt

REINHARDT, Circuit Judge

Defendant Robsac Industries ("Robsac") appeals the district court's entry of summary judgment for Continental Casualty Company ("Continental") on Continental's action for declaratory relief and its summary denial of Robsac's motion to stay the declaratory relief action pending the outcome of a parallel state court proceeding on the merits. This case raises the oft recurring problem of the proper role of the federal courts in the resolution of disputes relating to obligations under insurance policies, an area primarily within the jurisdiction of the state courts. We hold that in light of the pending state action the district court should not have exercised its jurisdiction to grant declaratory relief. Accordingly, we reverse and remand to the district court with instructions to dismiss the action.

FACTS AND PROCEEDINGS BELOW

Robsac is a California corporation. Prior to January, 1987, when it filed a bankruptcy petition, Robsac was in the business of selling artist and drafting supplies through its stores in several cities throughout the United States. In December, 1984, Continental, an Illinois corporation, issued an insurance policy to Robsac along with five other named subsidiaries. In September, 1986, Robert Sachs, the president of Robsac, contacted Robsac's insurance agent and advised him of a potential theft loss. As instructed by the agent, Robsac hired a private investigator to investigate the theft-loss claim. Robsac submitted an official "Proof of Loss" form to Continental on June 17, 1987. On November 25, 1987, Continental denied the claim in a letter to Robsac. Robsac filed suit against Continental for breach of contract in Los Angeles Superior Court on December 2, 1987. In addition to Continental, Robsac also named as defendants 50 Continental managerial level employees, designated as "Does 1 through 50." The parties agree that some of those employees work and reside in California. Almost a month later, on December 28, 1987, Continental filed this declaratory judgment action in the United States District Court for the Eastern District of Illinois. Continental sought a declaratory judgment that it was not liable under the policy. The sole basis for federal subject matter jurisdiction was diversity of citizenship, 28 U.S.C. § 1332. On June 1, 1988, Robsac moved for a stay of the federal action, or in the alternative, a transfer to the Central District of California. The alternative motion was granted and the case transferred.

On March 7, 1989, Robsac again moved to stay the federal action based upon the pendency of the state action, this time making its motion before the United States District Court for the Central District of California. The parties agree that the district court summarily denied the motion on April 3, 1989, although nothing in the record indicates that an order was ever entered reflecting this decision. Continental then moved for summary judgment on June 6, 1988. Continental argued that Robsac had assigned its entire interest in the claim to a third party or had waived any remaining interest, and that in any event Robsac had not introduced any admissible evidence to prove its alleged theft loss.

On April 28, 1989 the district court heard the motion and entered judgment in favor of Continental and against Robsac on the basis of the assignment/waiver issue. The court did not reach the underlying question whether Continental was liable (to Robsac or an assignee) under the policy. Robsac made an untimely motion for new trial or in the alternative, for reconsideration, which the court denied.*fn1

Robsac filed a timely appeal of the grant of Continental's summary judgment motion. We have jurisdiction under 28 U.S.C. § 1291.

Discussion

Robsac argues that the district court abused its discretion by granting declaratory relief during the pendency of the state court proceedings. Robsac relies principally on Colorado River Water Conservation District v. United States, 424 U.S. 800, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1976), and Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983), which set forth a total of six factors to which district courts generally should look in deciding whether to stay federal proceedings in favor of pending state court proceedings concerning the same subject matter. However, we recently held that "the Colorado River test . . . does not apply where the Declaratory Judgments Act, 28 U.S.C. § 2201, is involved." Chamberlain v. Allstate Ins. Co., 931 F.2d 1361, 1366 (9th Cir. 1991). Accordingly, the district court did not err in failing to abstain under the Colorado River doctrine.

Nonetheless, in light of Robsac's stay request, abstention is required under a different but related doctrine - the one applicable to declaratory relief cases. This doctrine was first set forth in Brillhart v. Excess Ins. Co., 316 U.S. 491, 86 L. Ed. 1620, 62 S. Ct. 1173 (1942). It stems from the fact that by its express terms the Declaratory Judgments Act makes the granting of declaratory relief discretionary. 28 U.S.C. § 2201(a) ("any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration") (emphasis added). At the time that Robsac moved for a stay our cases could have been read to imply that abstention under Colorado River and abstention pursuant to the terms of the Declaratory Judgments Act are governed by the same standards. Compare Transamerica Occidental Life Ins. Co. v. Digregorio, 811 F.2d 1249, 1254 (9th Cir. 1987) with Mobil Oil Corp. v. City of Long Beach, 772 F.2d 534, 542 (9th Cir. 1985). We have recently made clear, however, that this is not the case. See Chamberlain, 931 F.2d at 1366 n. 1. In Chamberlain, we narrowed considerably the discretion courts have to issue declaratory relief. We held that quite apart from any considerations under Colorado River, a district court's discretion to grant relief under the Declaratory Judgments Act ordinarily should not be exercised "where another suit is pending in a state court presenting the same issues, not governed by federal law, between the same parties." Id. at 1366 (quoting Brillhart, 316 U.S. at 495).*fn2

The record does not indicate why the district court decided to exercise its jurisdiction. However, this does not prevent us from considering the issue, because "we review de novo the district court's decision to exercise its jurisdiction under the Declaratory Judgments Act when a state action is pending." Chamberlain, 931 F.2d at 1366 (citing Fireman's Fund Ins. Co. v. Ignacio, 860 F.2d 353, 354 (9th Cir. 1988) (per curiam)). We may conduct that review now or remand and delay doing so until after another appeal is taken. See Allstate Ins. Co. v. Mercier, 913 F.2d 273, 277 (6th Cir. 1990). Whether we retain jurisdiction and proceed to decide the issue before us or whether we remand to the district court and defer our decision until later, we will still ultimately be obligated to exercise our own discretion in considering the propriety of the district court's grant or denial of declaratory relief.*fn3 Given the importance of the issue raised in this case and the delay already incurred by the parties, we elect to review the district court's exercise of jurisdiction now.

In considering the issue ourselves, we are guided by the same criteria and factors as guide the district court in its exercise of jurisdiction. See note 3 supra. We thus put ourselves in the same position as a district judge and determine whether, in the exercise of our discretion, the assumption of jurisdiction over this declaratory judgment action was proper. See United States v. State of Washington, 759 F.2d 1353, 1356-57 (9th Cir. 1985) (en banc) (per curiam) ("The court of appeals must exercise its own sound discretion to determine the propriety of the district court's grant or denial of declaratory relief.").

In resolving this appeal, we must apply the legal principles applicable at the time we consider the issue. See id. at 1357 (setting forth principles with respect to previously unsettled question governing the standards for exercising discretion to grant declaratory relief, and reversing the district court's grant of such relief on that basis). Accordingly, having elected to decide the question before us, we must now determine whether, under Chamberlain, Continental's declaratory relief action should be dismissed in deference to the pending state court proceeding. If it should be, then we are obligated to reverse, even if the law did not clearly establish that abstention was required at the time that the district court considered the question.

As we stated in Chamberlain, when a state court action is pending presenting the same issue of state law as is presented in a federal declaratory suit, "there exists a presumption that the entire suit should be heard in state court." Chamberlain, 931 F.2d at 1366-67 (citing Brillhart, 316 U.S. at 495). We also noted in Chamberlain that the Supreme Court's decision in Brillhart was based on three principal rationales. "First, the Court wanted to avoid having federal courts needlessly determine issues of state law." Chamberlain, 931 F.2d at 1367. Second, the Court wished to discourage litigants from filing declaratory ...


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