Government Employees Insurance v. Dizol (108 F.3d 999, 1997)

Opinion by Judge ALARCON; Dissent by Judge SCHROEDER.

ALARCON, Circuit Judge.

Alexander Dizol, as special administrator of the estate of Kevin Tate Dizol (the “Dizol Estate”), appeals from the district court’s grant of summary judgment in favor of Government Employees Insurance Company (“GEICO”). GEICO filed an action in this matter pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, seeking a declaration that it was not liable to the Dizol Estate as a beneficiary of an underinsured motorist’s policy. At the time this federal action was filed, an action was pending in state court between the Dizol Estate and the alleged tort-feasors.

In its order granting summary judgment on the merits of GEICO’s claim, the district court made no reference to the pending state court proceeding, or that it had the discretion to decline to exercise its jurisdiction under the Declaratory Judgment Act. The district court did not point to any facts or circumstances that warranted the assertion of its discretionary jurisdiction to reach the merits of GEICO’s novel state law question.

We must decide whether, pursuant to controlling case law, we should vacate the judgment, without reaching the merits of this appeal, and remand this matter to the district court with directions that it consider whether this ease presents circumstances that make it an appropriate case for the exercise of its discretionary jurisdiction under the Declaratory Judgment Act. As we explain below, we conclude that we must vacate and remand with directions, because the district court failed to indicate that it had considered, among all the other relevant factors, whether it is clear, under Hawaii law, that GEICO could not have obtained a resolution of its novel state law issues in the tort law proceeding that was pending in state court at the time the complaint for declaratory relief was filed, or in a separate action for a declaration under Hawaii law.

I

This action arises from a single-car collision in which the driver of the vehicle, Ver-nell Adams, and his passenger, Kevin Tate Dizol, were killed on September 14, 1991. Adams had consumed alcoholic beverages at the Highlands Bar & Grill (“Highlands Bar”) immediately prior to the accident. The Dizol Estate filed separate actions in Hawaii state court seeking damages for tort liability against the estate of Vernell Adams in 1991, and against Highlands Bar in 1993. These actions were later consolidated (the “state court tort action”).

The vehicle driven by Adams was insured by the Fireman’s Fire Insurance Company of Hawaii (“FFIC”). The liability limit on the FFIC policy was $35,000. Kevin Dizol had an underinsured motorist policy issued by USAA Insurance Company (“USAA”) in the amount of $35,000. The policy at issue in the federal declaratory judgment action was issued by GEICO to Dizol’s brother. This underinsured motorist policy had a face value of$70,000.

The Dizol Estate first notified GEICO of the pending state court actions in a letter dated August 12; 1994.' The Dizol Estate demanded coverage under the insurance policy issued by GEICO. In a December 1,1994 telephone conversation between counsel for GEICO and the Dizol Estate, GEICO’s counsel was informed that the. Dizol Estate had settled with Highlands Bar for $255,000. This amount is less than the policy limits. Highlands Bar was released from any further liability.

In a letter dated December 2, 1994, the Dizol Estate confirmed that it had accepted $15,000 in no-fault benefits; $255,000 from Highlands Bar; and would soon receive $35,-000 from FFIC on behalf of Adams. The letter also notified GEICO that the Dizol Estate had released Highlands Bar and FFIC from any further liability, and had obtained leave of the state court to release Adams’s estate. In addition to these payments, the record reveals that the Dizol Estate received $35,000 from Kevin Dizol’s un-derinsurance policy with USAA

On December 29, 1994, GEICO filed a complaint in the district court in this diversity action for a declaration under the Declaratory Judgment Act that the Dizol Estate had violated various provisions of the underinsurance policy. GEICO moved for summary judgment on the ground that it was not liable under the policy because the Dizol Estate violated the consent to settlement provision, by settling the state court claims without first notifying GEICO; the exhaustion provision, by settling with Highlands Bar for less than the total coverage available under the FFIC policy; and the notice requirement, by failing to notify GEICO of .the accident until over three years after its occurrence, and by failing to provide timely copies of the pleadings filed in the state court actions. Alternatively, GEICO • contended that any amount payable to the Dizol Estate under the underinsurance policy should be offset by the $35,000 policy limits received on behalf of Adams’s estate, and the full amount of the policy coverage available to Highlands Bar. Finally, GEICO claimed that the Dizol Estate’s claim was- barred by the statute of limitations.

The district court granted summary judgment in favor of GEICO. The court held that the claim of Dizol’s Estate was not barred by the statute of limitations, but GEI-CO was not hable because the Dizol- Estate violated the consent to settlement condition of the policy.

Neither party made any reference before the district court to the fact that the court’s jurisdiction under the Declaratory Judgment Act was discretionary, nor did they point to any special circumstances in this case that weighed in favor of reaching the merits of GEICO’s contentions. Thus, the parties did not inform the district court that it had to decide whether it should exercise its discretion to grant a declaration in view of the fact that a related proceeding was pending in state court at the time this action was filed. The district court’s written order makes no reference to the discretionary nature of its jurisdiction. This issue was not discussed by either party in the initial briefs filed before this court.

On September 20, 1996, we directed the parties to file supplemental briefs “addressing the question whether the district court properly exercised jurisdiction over a request for a declaratory judgment that raises only questions of state law and was brought during the pendency of a related state court proceeding, and, if not, whether the court should remand with directions to dismiss the complaint.”

In its response to our request, the Dizol Estate urged us to vacate the judgment of the district court and remand with instructions to dismiss. The Dizol Estate argued that this action presents novel state law issues that should have been resolved in the state court tort action that was pending at the time this action was filed in the district court. Finally, the Dizol Estate asserts that there is no evidence in the present record of any circumstances that warrant the district court’s exercise of its discretionary jurisdiction.

GEICO urges us to- affirm because the underlying state court tort action was settled prior to the filing of this matter in the district court on December 29, 1994. GEICO argues that although the state court action was not dismissed until April 24, 1995, “[pjractically, no ‘pending state action existed at the time GEICO filed its declaratory relief action in federal district court on December 29, 1994.” GEICO also asserts that the action was not parallel because the state court dispute did not arise out of the same factual transaction or occurrence. GEICO points out that the state action concerned the tort liability of the driver of the ear and the establishment that had served him alcohol, while the matter before this court involves the question whether GEICO is contractually liable to a beneficiary of the policy, in view of the fact that the Dizol Estate allegedly faded to give proper notice of the proposed settlement, and did not obtain GEICO’s consent to settle.

II

Before we can review the merits of this appeal, we must decide if the district court should have considered abstaining from the exercise of its discretionary jurisdiction to issue a declaration in light of all the relevant factors, including the remedies available under Hawaii law at the time this action was filed.

Prior to 1934, an insurance company, involved in a dispute with its insured over coverage, could not invoke the jurisdiction of a federal district court by filing an action to seek a judicial declaration of its liability under the policy. Instead, an insurance company was required to wait until the insured filed an action for breach of contract. If the insured filed in state court, the insurance company could remove the action to federal court if the parties were diverse and the matter in controversy exceeded the jurisdictional amount. If, however, the insured delayed the filing of an action in state or federal court for a protracted period of time, the insurance company risked losing “the benefit of evidence through disappearance, illness, or death of witnesses.” Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239, 57 S.Ct. 461,463, 81 L.Ed. 617 (1937). In addition, the insurance company was compelled to maintain reserves indefinitely to cover its potential liability until the dispute was resolved in a court action. Id.

The enactment of the Declaratory Judgment Act of 1934, Pub.L. No. 73-512, 48 Stat. 955 (codified as amended at 28 U.S.C. §§ 2201-2202) has provided a remedy for a litigant faced with this dilemma. An insurance company, or any party faced with the threat of legal action over a disputed claim, can now file an action in federal court requesting a declaration of the rights and obligations of the parties, provided there exists an independent jurisdictional basis, Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-72, 70 S.Ct. 876, 878-79, 94 L.Ed. 1194 (1950), without having to wait for the other party to file an action for damages or an injunction.

In its present form, the Declaratory Judgment Act provides in relevant part:

In a case of actual controversy within its jurisdiction ... 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, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.

28 U.S.C. § 2201(a) (emphasis added).

Professors Wright and Miller have described the goal of the Declaratory Judgment Act as follows: “[It] is intended to minimize the danger of avoidable loss and the unnecessary accrual of damages and to afford one threatened with liability an early adjudication without waiting until his adversary should see fit to begin an action after the damage has accrued.” 10A Charles Alan Wright et al., Federal Practice and Procedure § 2751, at 569 (2d ed. 1983).

In Haworth, the Court held that the use of the term “actual controversy” in the Declaratory Judgment Act does not require that a dispute between the parties has ripened to the point that a party previously filed an action for damages or injunctive relief. A district court may grant relief in an action filed under the Declaratory Judgment Act if there is “a real and substantial controversy admitting of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.” Haworth, 300 U.S. at 241, 57 S.Ct. at 464.

The district court in Haworth dismissed the complaint on jurisdictional grounds. Id. at 236, 57 S.Ct. at 462. The Supreme Court reversed, holding that there was a definite and concrete “dispute relating] to legal rights and obligations arising from the contracts of insurance.” Id. at 242, 57 S.Ct. at 464.

In Haworth, the district court denied relief under the Declaratory Judgment Act because it erroneously concluded it lacked the jurisdiction to assert its judicial power. The lesson of Haworth is that a district court has the jurisdiction to exercise its discretion to grant declaratory relief, although no action is pending in state court that offers a forum for the resolution of the parties’ dispute over coverage.

A

In Brillhart v. Excess Ins. Co., 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942), the Supreme Court addressed the discretion granted the district courts by the Declaratory Judgment Act to decline to exercise their jurisdiction over eases otherwise properly within their subject matter jurisdiction. The district court in Brillhart dismissed an action filed by an insurance company under the Declaratory Judgment Act because related proceedings were pending in state court. The district court did not indicate in its order whether the issue presented in the declaratory relief action could have been raised by the plaintiff insurance company in the pending state court proceeding. The Tenth Circuit reversed with directions that the trial court proceed to a trial on the merits. Id. at 493-94, 62 S.Ct. at 1174-75.

The Supreme Court began its analysis by pointing out that, “[ajlthough the district court had jurisdiction of the suit under the Federal Declaratory Judgment[ ] Act, it was under no compulsion to exercise that jurisdiction.” Id. at 494, 62 S.Ct. at 1175. The Court next observed that

[ojrdinarily 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. Gratuitous interference with the orderly and comprehensive disposition of a state court litigation should be avoided.

Id. at 495, 62 S.Ct. at 1175-76.

The Court reversed the judgment of the Tenth Circuit and directed it to remand the matter to the district court with directions that the trial judge determine “whether, under applicable local law, the claims sought to be adjudicated by the respondent in this suit for a declaratory judgment had either been foreclosed by Missouri law or could adequately be tested in the garnishment proceeding pending in the Missouri state court.” Id. at 495-96, 62 S.Ct. at 1176. In sum, to comply with Brillhart, before exercising its jurisdiction under the Declaratory Judgment Act, a district court must determine whether there is another action pending in state court between the same parties, or, if not, whether state law forecloses the presentation of the federal plaintiffs claims in that forum.

In Wilton v. Seven Falls Co., - U.S. -, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995), the Supreme Court reaffirmed the discretionary standard it announced in Brillhart. Id. at -, 115 S.Ct. at 2140-43. In Wilton, the district court issued a stay of the declaratory judgment action pending the determination of parallel proceedings in state court. The Fifth Circuit affirmed. Id. at -, 115 S.Ct. at 2139-40.

The Court in Wilton rejected the argument that under Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 96 S.Ct. 1236,47 L.Ed.2d 483 (1976), and Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Edüd 765 (1983), a district court' must exercise the discretionary jurisdiction conferred on it by Congress in the Declaratory Judgment Act where there is a parallel state action, in the absence of evidence of exceptional circumstances that would warrant abstention. Wilton, - U.S. at -, 115 S.Ct. at 2140-41.

The Court held that the “[d]istinct features of the Declaratory Judgment Act ... justify a standard vesting district courts with greater discretion in declaratory judgment actions than permitted under the ‘exceptional circumstances’ test of Colorado River and Moses H. Cone.” Wilton, - U.S. at -, 115 S.Ct. at 2142. In support of this proposition, the Court commented as follows: “Since its inception, the Declaratory Judgment Act has been understood to confer on federal courts unique and substantial discretion in deciding whether to declare the rights of litigants.” Id. In a later passage, the Court stated, “[w]e have repeatedly characterized the Declaratory Judgment Act as ‘an enabling Act, which confers a discretion on the courts rather than an absolute right upon the litigant.’ ” Id. at -, 115 S.Ct. at 2143 (quoting Public Serv. Comm’n v. Wycoff Co., 344 U.S. 237, 241, 73 S.Ct. 236, 239, 97 L.Ed. 291 (1952)).

The Court concluded its discussion of the district court’s discretionary authority in Wilton with these words:

Consistent with the nonobligatory nature of the remedy, a district court is authorized, in the sound exercise of its discretion, to stay or dismiss an action seeking a declaratory judgment before trial or after all arguments have drawn to a close. In the declaratory judgment context, the normal principle that federal courts should adjudicate claims within their jurisdiction yields to considerations of practicality and wise judicial administration.

Id. at-, 115 S.Ct. at 2143.

B

Application of the Brillhart interpretation of the Declaratory Judgment Act to this matter is complicated by the failure of the parties to recognize that the district court’s jurisdiction is discretionary. For that reason the record is silent regarding whether there are any circumstances that weigh in favor of, or are contrary to, the exercise of the district court’s discretionary jurisdiction in this case.

It is undisputed that on the date GEICO’s complaint was filed in federal court, an action was pending in state court among the Dizol Estate, the estate of Adams, and Highlands Bar concerning the extent of the damages that should be awarded if Vemell Adams’s negligence caused Kevin Dizol’s death. The parties did not inform the district court, and the record does not disclose, whether under Hawaii law GEICO could have, or should have, been joined as a party, or could have attempted to intervene in the state court proceedings to protect its interest in avoiding or limiting its liability under its underinsurance policy. The district court also failed to indicate whether, under these circumstances, the interests of comity and sound judicial administration would be better served if GEICO had filed for declaratory relief in a Hawaii court pursuant to Haw.Rev.Stat. § 632-1.

The Supreme Court made clear fifty-four years ago in Brillhart that the question whether an adequate remedy exists in the state court for the federal plaintiff is “a matter for determination, certainly in the first instance, by the District Court.” Brillhart, 316 U.S. at 496, 62 S.Ct. at 1176.

The Court explained its holding as follows: If the lower courts had found that under Missouri law the respondent’s claims could not adequately be tested in the pending garnishment proceeding, or that Missouri law on the subject was doubtful, and upon the basis of such a finding had taken jurisdiction of this suit for a declaratory judgment, we would not disturb such a finding. But no such finding can be extracted from this record. And it is not for us to attempt to pronounce independently upon Missouri law. To do so would be to disregard the limitations inherent in our appellate jurisdiction.

Id. at 496-97, 62 S.Ct. at 1176 (emphasis added).

Under Brillhart, a district court must, therefore, consider, in the first instance, whether the issues raised in an action filed under the Declaratory Judgment Act can be resolved between the parties in a pending state court action. Failure of the district court to perform this essentially fact finding function may lead to a time consuming, vexatious, and unnecessary determination of the merits of unresolved state law issues.

The Supreme Court has yet to address the problem presented in this case: What is the appropriate response by an appellate court when the district court fails to conduct the inquiry mandated by Brillhart before exercising its discretionary jurisdiction under the Declaratory Judgment Act? As discussed above, in Brillhart, the district court summarily dismissed a federal declaratory judgment action because an action was pending in the state court involving the same issues. Id. at 493-94, 62 S.Ct. at 1174-75. In Wilton, the district court granted a stay, without issuing a declaration, because the pending state action “encompassed the same coverage issues.” Wilton, - U.S. at -, 115 S.Ct. át 2139.

We faced this precise question in American Nat’l Fire Ins. Co. v. Hungerford, 53 F.3d 1012 (9th Cir.1995). In Hungerford, the district court granted summary judgment in favor of the plaintiff insurance company in its dispute with its insured over liability under an insurance policy. Id. at 1013-14. The district court “did not refer to the discretionary nature of its jurisdiction under the Declaratory Judgment Act, 28 U.S.C. § 2201.” Id. at 1014.

We held in Hungerford that the fact that “[t]he record does not indicate why the district court decided to exercise its jurisdiction .... does not prevent us from considering the issue.” Id. at 1015. We reasoned that we could exercise our own discretion in determining the propriety of the district court’s grant of declaratory relief because, under the law of this circuit, we reviewed de novo a district court’s exercise of jurisdiction under the Declaratory Judgment Act when a state action is pending. Id. After independently reviewing the record, we concluded that the district court erred in reaching the merits because there were “no compelling justifications” for granting declaratory relief during the pendency of a concurrent related state court proceeding and the availability of a state procedure for obtaining a declaration. Id. at 1016-19 (citing Allstate Ins. Co. v. Mercier, 913 F.2d 273, 278-79 (6th Cir.1990)). We vacated the district court’s judgment in Hungerford and remanded with directions to dismiss the action. Id. at 1019.

Our decision in Hungerford was filed on April 27, 1995. A few weeks later, on June 12, 1995, the Supreme Court resolved “the question whether discretion to entertain declaratory judgment actions is vested in district courts alone or in the entire judicial system.” Wilton, - U.S. at -, 115 S.Ct. at 2143. The Court held that the district court’s decision to grant or to refrain from granting declaratory relief must be reviewed for abuse of discretion. The Court rejected the “invitation” to adopt a de novo standard of review.- Id. at-, 115 S.Ct. at 2143^4. The Court stated: