Philadelphia Indemnity Insurance Company v. Bella Vista Village Property Owners Association

IN THE UNITED STATES DISTRICT COURT FOR THE

WESTERN DISTRICT OF ARKANSAS

FAYETTEVILLE DIVISION

PHILADELPHIA INDEMNITY

INSURANCE COMPANY PLAINTIFF

V. CASE NO. 5:19-CV-05117

BELLA VISTA VILLAGE PROPERTY

OWNERS ASSOCIATION DEFENDANT

MEMORANDUM OPINION AND ORDER

Before the Court is a Motion to Dismiss, Stay, or Abstain (Doc. 7) and

Memorandum in Support (Doc. 8) by Defendant Bella Vista Village Property Owners

Association (the “POA”). Plaintiff Philadelphia Indemnity Insurance Company (“PIIC”) filed

a Response in Opposition (Doc. 12), and the POA filed a Reply (Doc. 18). For the reasons

discussed below, the Court hereby GRANTS the POA’s Motion and STAYS the action

pending the resolution of parallel litigation in state court.

I. BACKGROUND

In summer 2018, a fire ignited at a property known as the Trafalgar Road Stump

Dump, located in Bella Vista, Arkansas. The POA, which leased the site from 2004

through 2016, faces liability for the fire from three sources. First, the Arkansas

Department of Environmental Quality (“ADEQ”), having found hazardous materials at the

site, sought public funds to put out the fire and stabilize the area and gave notice that it

would pursue the POA, among other parties, to recover those expenditures. To mitigate

its potential exposure, the POA entered into an agreement with the ADEQ and hired its

own contractor to perform the required services at significantly lower cost than the price

quoted to the government. The POA has spent close to four million dollars extinguishing

the fire and stabilizing and remediating the site. Second, the POA was named as a

defendant in a suit brought in Circuit Court in Benton County, Parsons v. Bella Vista POA,

04CV-19-263. The plaintiff brought suit against the POA and others to recover public

funds spent in response to the Stump Dump fire. The case was subsequently dismissed

as to the POA, but the POA expended resources mounting a defense. Finally, the POA

has been named as a defendant in Macomber v. Samuel Care Enterprises, Inc., 04CV-

18-3332 (the “Macomber case”), also filed in Benton County Circuit Court. The plaintiffs

in that case, residents of Benton County, are suing the POA and others for damages

resulting from the Stump Dump fire and defendants’ alleged dumping of hazardous waste

at the site. The POA, in turn, has filed crossclaims against co-defendants who owned or

operated the Stump Dump, seeking contribution for the money the POA expended in

fulfilling its agreement with the ADEQ. At least one former owner of the Stump Dump site

has also filed a crossclaim against the POA seeking indemnification under a lease term

that required the POA to extend its insurance coverage to the owner of the leased

property.

Faced with liability as a result of its settlement with the ADEQ and the state court

litigation described above, the POA provided notice to its insurance company, PIIC,

requesting coverage pursuant to its policies. PIIC insured the POA between 2007 and

2019, issuing fifty-five policies during that period. In June 2019, after reviewing all of the

POA’s policies, PIIC informed the POA that its insurance policies did not provide coverage

for any of the claims described above. On June 24, 2019, the POA filed a third-party

complaint against PIIC in the Macomber case, seeking declaratory judgment on the

POA’s coverage under thirty-six of its policies from PIIC, as well as damages for PIIC’s

failure to provide a defense and indemnity.1 Two days later, on June 26, PIIC filed its

Complaint in this Court seeking declaratory judgment that none of the fifty-five policies it

issued to the POA provide coverage for any of the claims related to the Stump Dump fire.

PIIC subsequently filed a motion to dismiss in the Macomber case, which the state

court denied, followed by an answer and counterclaim against the POA, seeking

declaratory judgment on the nineteen policies not raised by the POA in its third-party

complaint before the state court. The POA, in turn, filed the instant Motion before this

Court asserting that the Macomber case and this case are parallel litigation and urging

this Court to exercise its discretion under Brillhart/Wilton to abstain in favor of allowing

the state court to resolve the dispute. The POA also argues that this Court should also

stay or dismiss these proceedings because the POA’s third-party complaint against PIIC

in the Macomber case was filed before PIIC’s complaint in this Court and because PIIC

is engaging in impermissible forum shopping by bringing this suit in federal court. PIIC

responds that the Macomber case is not parallel to its federal Complaint, and the relevant

factors weigh in favor of this Court issuing declaratory judgment.

II. LEGAL STANDARD

“Generally, a federal district court must exercise its jurisdiction over a claim unless

there are exceptional circumstances for not doing so.” Scottsdale Ins. Co. v. Detco Indus.,

Inc., 426 F.3d 994, 996 (8th Cir. 2005) (internal quotation marks omitted). Federal courts

have “the virtually unflagging obligation . . . to exercise the jurisdiction given them.” Colo.

1 PIIC is referred to as “PHLY” in the Macomber case filings. The POA also refers to the

Defendant as PHLY in its briefing before this Court. No one disputes, however, that the

acronyms PIIC and PHLY both refer to Philadelphia Indemnity Insurance Company.

Because the company styles itself as PIIC before this Court, that is the acronym that the

Court will use.

River Water Conservation Dist. v. United States, 424 US 800, 817 (1976). In this context,

however, the Supreme Court has expressed that the “[d]istinct features of the Declaratory

Judgment Act, we believe, justify a standard vesting district courts with greater discretion

in declaratory judgment actions than that permitted under the ‘exceptional circumstances’

test of Colorado River and Moses H. Cone.” Wilton v. Seven Falls Co., 515 U.S. 277, 286

(1995). Where an action seeks declaratory judgment, “obligatory jurisdiction yields to

considerations of practicality and wise judicial administration.” Scottsdale, 426 F.3d at

997.

“The full scope of a district court’s discretion to grant a stay or abstain from

exercising jurisdiction under the Declaratory Judgment Act differs depending upon

whether a ‘parallel’ state court action involving questions of state law is pending.”

Lexington Ins. Co. v. Integrity Land Title Co., Inc., 721 F.3d 958, 967 (2013). Thus, the

determination of whether a suit for declaratory judgment in a federal court is parallel to a

state court action is a “threshold determination for identifying the extent of a district court’s

discretion to grant a stay.” Id. at 968. “Suits are parallel if substantially the same parties

litigate substantially the same issues in different forums.” Scottsdale, 426 F.3d at 997

(internal quotations omitted).

Where parallel litigation is pending in state court, the district court has broad

discretion to abstain. “This broad discretion is to be guided by considerations of judicial

economy, by considerations of practicality and wise judicial administration, and with

attention to avoiding gratuitous interference with state proceedings.” Lexington, 721 F.3d

at 967 (internal quotation marks and citations omitted). The district court should assess,

among other relevant factors, “the scope of the pending state court proceeding and the

nature of defenses open there” by considering “whether the claims of all parties in interest

can satisfactorily be adjudicated in that proceeding, whether necessary parties have been

joined, [and] whether such parties are amenable to process in that proceeding.” Wilton,

515 U.S. at 283 (summarizing and affirming the factors laid out by the Court in Brillhart v.

Excess Ins. Co. of America, 316 U.S. 491 (1942)). If these factors reflect favorably on the

state court proceeding, the federal court will ordinarily abstain because “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 a state court presenting the same issues, not

governed by federal law, between the same parties.” Brillhart, 316 U.S. at 495.

When a district court exercises its discretion to abstain in a declaratory judgment

action because of parallel litigation, it is generally appropriate to stay, rather than dismiss,

the federal action. See Wilton, 515 U.S. at 288 n.2 (“[W]here the basis for declining to

proceed is the pendency of a state proceeding, a stay will often be the preferable course,

because it assures that the federal action can proceed without risk of a time bar if the

state case . . . fails to resolve the matter.”); see also Royal Indem. Co. v. Apex Oil Co.,

511 F.3d 788 (8th Cir. 2008) (affirming the district court’s decision to abstain under

Brillhart/Wilton but vacating the dismissal order and remanding for the lower court to enter

a stay).

III. DISCUSSION

A. Parallel Litigation

As a threshold matter, the instant litigation is parallel with the Macomber case in

Benton County Circuit Court. Both parties before this Court are also party to the action in

state court. In the Macomber case, the POA seeks declaratory judgment regarding

coverage for the ADEQ, Parsons, and Macomber claims under policies issued by PIIC.

The same matter is before this Court.

PIIC argues that the cases are not parallel because its petition for declaratory

judgement in this Court invokes all fifty-five policies issued to the POA by PIIC, while the

POA’s third-party complaint in state court only raises thirty-six of those policies.

Therefore, PIIC argues, the Macomber case cannot fully resolve the dispute before this

Court. In support of its position, PIIC directs the Court to Lexington, 721 F.3d 958, in

which the federal court held that the state court proceedings were not parallel because it

was possible that they would be resolved without resolving the dispute before the federal

court.

In Lexington, the Lexington Insurance Company (“Lexington”) sought declaratory

judgment in federal court that it did not owe Integrity Title Company (“Integrity”) defense

or coverage under its errors and omissions (E&O) insurance policy. Id. at 961. Fidelity

National Finance (“Fidelity”), another title insurance company, which hoped to recover

from both Lexington and Integrity, intervened. Id. Fidelity then argued that the federal

court should abstain in favor of parallel litigation it had filed in state court. Id. The Eighth

Circuit held that the state litigation was not parallel because even though Lexington,

Integrity, and Fidelity were all parties, the court did not believe that the state court actions,

“as pled and argued by Fidelity, would fully or satisfactorily resolve the uncertainty

surrounding Lexington’s duties toward Integrity,” the matter on which declaratory

judgment was sought in federal court, since Fidelity’s claims could be resolved without

reference to the E&O policy. Id. at 970 (emphasis added). Similarly, in another state court

action, Fidelity named Lexington as a defendant only as a third-party beneficiary, and “the

possible state-court resolution of Fidelity’s third-party beneficiary claims against

Lexington could occur in several different ways, many of which would not require the state

court to address Lexington’s duty towards Integrity.” Id. Concluding that the state and

federal cases were not parallel, the court applied the Scottsdale factors rather than

Brillhart/Wilton. Id. at 971. Based on its analysis of those factors, the Eighth Circuit

affirmed the district court’s decision to issue declaratory judgment. Id.

Here, in contrast, the full range of claims between the parties is squarely before

the state court. In the Macomber case, the POA seeks declaratory judgment on thirty-six

insurance policies, alongside claims for defense, indemnification, and damages. PIIC has

raised the other nineteen policies as counterclaims against the POA. See Doc. 18, Exh.

1. Thus, all fifty-five insurance policies on which PIIC seeks declaratory judgment from

this Court are also squarely before the state court in the Macomber case. The state court’s

resolution of the POA’s third-party complaint will necessarily resolve all the issues before

this Court, and the cases are parallel.

B. Brillhart/Wilton Abstention

Because the Court concludes that this case and the Macomber case are parallel

litigation, the Scottsdale factors are not relevant. See Scottsdale, 426 F.3d at 998 (laying

out the factors guiding the narrower discretion of a district court to abstain in a declaratory

judgment action where no parallel litigation is pending in state court). Instead, in deciding

whether to abstain, the Court weighs the Brillhart/Wilton factors and other factors relevant

to considerations of judicial economy, wise judicial administration, and avoiding gratuitous

interference with the state court.

Considering the Brillhart/Wilton factors shows that the state court is in a better

position to adjudicate the issues. As discussed above, PIIC has raised its claims before

this Court as affirmative defenses in the Macomber case, and the state court will resolve

all the claims pending here. Additionally, resolving the insurance dispute will be a matter

of state, not federal, law. Furthermore, there are additional parties and factual issues that

the state court is best situated to address. For this Court to proceed would risk

uneconomical and gratuitous interference in the state case that is already ongoing.

First, there are parties with potential interest in the extent of the POA’s insurance

coverage under its PIIC policies who are already joined in the Macomber case but are not

parties to this federal suit. The POA alleges that it purchased policies that extended its

insurance coverage to the “lessors of premises” rented by the POA, giving the various

owners who leased the Stump Dump to the POA a potential interest in a declaratory

judgment action regarding the coverage provided by the insurance policies at issue.

These parties, namely Tom Fredericks and Blue Mountain Storage, are already party to

the Macomber case, and one has already asserted a crossclaim against the POA relevant

to the extent of its insurance coverage from PIIC.

Additionally, making coverage determinations under the disputed policies might

require this Court to make findings on issues of fact that are already before the state court

in the Macomber case. For example, the state court (or a state-court jury) will need to

determine what caused the Stump Dump fire, the role played by the various defendants,

and the nature of the damages. These are also questions that may be relevant to whether

the POA is entitled to coverage from PIIC. Specifically, the POA asserts that it had

Directors and Officers, or D&O, policies that may provide coverage for the negligent

decision-making of past members of the board of directors. Whether such negligence

occurred will necessarily be decided in the Macomber case. Additionally, PIIC seeks

rescission of the Commercial General Liability policies on the grounds that the POA hid

its interest in the Stump Dump when it answered “no” to a question regarding whether it

“had any past, present, or discontinued operations involving the storing, treating,

discharging, applying, disposing, or transporting of hazardous materials (e.g. landfills,

wastes, fuel tanks, etc.).” (Doc. 2, ¶ 37). Whether there were hazardous materials at the

Stump Dump during the period of the POA’s interest and whether the POA is responsible

for those materials are undoubtedly questions of fact that will be addressed by the state

court. For this Court to weigh in on those matters as well would fly in the face of notions

of judicial economy and risk gratuitous interference in state court proceedings. Instead,

the Court will abstain and stay these proceedings pending the resolution of the Macomber

case.

In its Motion, the POA also offers the “first-filed rule” and concerns about forum

shopping as additional bases for this Court to stay or dismiss the instant federal litigation.

Because the Court will abstain under Brillhart/Wilton, it need not reach these arguments.

IV. CONCLUSION

Therefore, the POA’s Motion to Dismiss, Stay, or Abstain (Doc. 7) is GRANTED

and the proceedings are STAYED pending the resolution of Macomber v. Samuel Care

Enterprises, Inc., 04CV-18-3332 in the Circuit Court of Benton County. The Clerk of Court

is directed to ADMINISTRATIVELY TERMINATE the case, and the parties may file a

motion to lift the stay and reopen the case when the state court matter is resolved.

Additionally, the parties are directed to file a joint report, of not more than one page,

updating the Court as to the status of the proceedings in the Macomber case. Such a

report should be filed at the end of each calendar quarter, beginning March 31, 2020.

IT IS SO ORDERED on this 7th day of November, 2019.

_/s/_Timothy L. Brooks___________

TIMOTHY L. BROOKS

UNITED STATES DISTRICT JUDGE