Where To Sue Since Summy

By Allison L. Krupp, Esq.*

The Declaratory Judgment Act, 28 U.S.C. §§2201-2202, gives federal district courts the discretion to adjudicate declaratory judgment actions. In 2000, the Third Circuit reviewed the Declaratory Judgment Act, 28 U.S.C.S. § 2201(a), at some length and attempted to identify certain parameters for when a federal court should or shouldn’t entertain jurisdiction over a declaratory judgment action (diversity notwithstanding). The case of State Auto Ins. Cos. v. Summy, 234 F.3d 131 (3d Cir. 2000) was a declaratory judgment action filed to resolve an insurance coverage issue (pollution exclusion). When the district court complaint was filed, however, there were already two state court actions pending—the second of which was itself a declaratory judgment action to determine the same coverage issue raised in the district court. Additionally, the particular exclusion at issue had been the subject of inconsistent state court opinions up to that point.

The Third Circuit listed several “relevant considerations” that district courts should address when determining whether to exercise diversity jurisdiction in declaratory judgment actions involving insurance coverage matters. These include:

• A general policy of restraint when the same issues are pending in a state court;
• An inherent conflict of interest between an insurer’s duty to defend in a state court and its attempt to characterize that suit in federal court as falling within the scope of a policy exclusion; and
• Avoidance of duplicative litigation.

Summy, 234 F.3d at 134 (citing United States v. Dept. of Environmental Resources, 923 F.2d 1071, 1075 (3d Cir. 1991) (emphasis supplied)).

In a series of post-Summy cases, when federal courts likewise declined to exercise jurisdiction, it was because one or more of the Summy criteria was present. The trend, particularly in recent years (and months), has clearly been against keeping these cases in federal court.

Recently, the Third Circuit revisited this issue and attempted to clarify when it may be appropriate for district courts to exercise their discretionary jurisdiction over these types of actions. In Reifer v. Westport Insurance Corporation, 751 F.3d 129 (3d Cir. 2014), the Third Circuit considered whether the Middle District of Pennsylvania had abused its discretion by remanding a declaratory judgment action to state court. Reifer had filed a malpractice lawsuit against his former attorney in state court, via a praecipe for writ of summons. The attorney failed to inform his malpractice insurer, Westport Insurance, of the action. Reifer subsequently filed a complaint that was served upon the attorney, who then notified Westport of the claim. Westport denied coverage and refused to defend the attorney since he had failed to timely notify it of the malpractice suit.

The attorney eventually admitted liability; however, the issue of damages was tried in state court, and the jury awarded Reifer $4,251,516, plus delay damages. The attorney subsequently assigned to Reifer any rights he might have had under his policy with Westport.

Reifer filed suit against Westport for a declaratory judgment in the Lackawanna County Court of Common Pleas. Westport subsequently removed the case to the Middle District of Pennsylvania and moved to dismiss the action on its merits. Reifer opposed the motion and moved to amend her complaint, which Westport opposed. Interestingly, neither party argued that the district court should decline discretionary jurisdiction over the case. Regardless, the court, sua sponte, remanded the case to state court. Westport filed a motion for reconsideration, which the district court denied, and then appealed to the Third Circuit.

Two issues were presented to the Third Circuit. First, whether the Declaratory Judgment Act (DJA), under which the district dourt had declined to exercise jurisdiction, applied. Second, if so, whether the district court had abused its discretion in declining jurisdiction.

The Third Circuit explained that the DJA confers discretionary, rather than compulsory, jurisdiction upon the federal courts. Westport argued that the district court did not have discretion to decline jurisdiction because the requirements for diversity jurisdiction had been satisfied and the DJA did not apply. While the action was identified in terms of declaratory judgment, Westport argued that it was really a suit which sought a judgment compelling the payment of money damages. The court disagreed and held that Reifer’s complaint simply sought a declaratory judgment that Westport “must pay” the damages that had already been awarded to her by the jury in the state court action. Furthermore, the mere fact that additional financial recovery might flow to Reifer as a result of the declaratory judgment action did not preclude the applicability of the DJA.

Next, the court considered whether the district court had abused its discretion in declining to entertain the action where there were no pending parallel state court proceedings. The court ultimately concluded that declining jurisdiction was not an abuse of discretion since Reifer had raised issues of state law peculiarly within the purview of the Pennsylvania court system.

The court explained that federal courts have substantial discretion to decide whether to exercise DJA jurisdiction; however, this discretion is bounded and reviewable. It went on to note that throughout the years, the Third Circuit has enumerated certain factors the district courts should consider when exercising DJA discretion. These include the following four general factors:

1. The likelihood that a federal court declaration will resolve the uncertainty of obligation which gave rise to the controversy;
2. The convenience of the parties;
3. The public interest in settlement of the uncertainty of obligation; and
4. The availability and relative convenience of other remedies.

The court also discussed the “suggested relevant considerations” outlined in Summy. The court observed that declaratory judgment actions involving insurance coverage issues have been particularly “fertile ground” for exercising and “testing the boundaries of” DJA discretion, since Summy. Prior to Reifer, the Third Circuit had never squarely addressed the limits of DJA discretion, absent a pending parallel state court proceeding. The court noted that the district courts faced with this question have applied Summy with varying results.

The court explained that the mere existence of a related state court proceeding does not require a district court to decline to exercise its jurisdiction under the DJA. The existence or non-existence of a parallel state court proceeding is but one factor the district court should consider when determining whether to exercise jurisdiction, and—the Third Circuit held—Summy does not compel a contrary result. Thus, the court concluded that it is not a per se abuse of discretion for a district court to decline to exercise jurisdiction when pending parallel state proceedings do not exist. Likewise, it is not a per se abuse of discretion for a court to exercise jurisdiction when a pending parallel state proceeding does exist. The court noted, however, that the absence of a pending parallel state proceeding militates “significantly” in favor of exercising jurisdiction, but does not, in and of itself, mandate such an exercise of discretion. Likewise, the existence of a pending parallel state proceeding militates “significantly” in favor of declining jurisdiction, but does not require doing so.

In an effort to perhaps clarify and provide some uniformity to the factors district courts are to consider, the Third Circuit provided the following non-exhaustive list:

1. The likelihood that a federal court declaration will resolve the uncertainty of obligation which gave rise to the controversy;
2. The convenience of the parties;
3. The public interest in settlement of the uncertainty of obligation;
4. The availability and relative convenience of other remedies;
5. A general policy of restraint when the same issues are pending in a state court;
6. Avoidance of duplicative litigation;
7. Prevention of the use of the declaratory action as a method of procedural fencing or as a means to provide another forum in a race for res judicata; and
8. (In the insurance context), an inherent conflict of interest between an insurer’s duty to defend in a state court and its attempt to characterize that suit in federal court as falling within the scope of a policy exclusion.

The court noted that there is nothing to distinguish insurance coverage cases from any other declaratory judgment action. It stated that these types of actions implicate neither an improper use of procedure by insurance companies, nor unfairness to insureds.

Based upon the above analysis and consideration of the aforementioned factors, the court ruled that the Middle District’s decision to decline jurisdiction over the action was proper. It found that the lack of pending parallel state court proceedings had been outweighed by another relevant consideration—the nature of the state law issue raised by Reifer.

While Reifer v. Westport did not break any new ground, it did help to confirm that the pendency of state court proceedings is a significant factor the district courts should consider. What is disconcerting is the court’s approval of a refusal to exercise jurisdiction under the DJA, even when there was no pending state court proceeding. The Reifer case raises a very real question about whether—or how often—federal district courts will ever entertain insurance coverage declaratory judgment actions from this point forward. Not only did Reifer fail to answer the “Where to sue since Summy?” question, it has raised concerns that the exercise of diversity jurisdiction under the DJA will be the exception, not the rule.

*Allison is an associate in our Harrisburg, Pennsylvania office who can be reached at 717.651.3510 or alkrupp@mdwcg.com.

Defense Digest, Vol. 20, No. 3, September 2014

Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Copyright © 2014 Marshall Dennehey Warner Coleman & Goggin, all rights reserved. This article may not be reprinted without the express written permission of our firm.