Golden Eagle Insurance Company v. Travelers Companies

Citations: 103 F.3d 750; 1996 WL 734085Docket: 94-56211

Court: Court of Appeals for the Ninth Circuit; December 24, 1996; Federal Appellate Court

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Golden Eagle Insurance Company sued Charter Oak Fire Insurance Company seeking a declaratory judgment that Charter Oak had a duty to defend Aero-Crete, Inc. in a construction defect lawsuit. After Charter Oak removed the case to federal court, the district court granted summary judgment in favor of Charter Oak, concluding it had no duty to defend. Golden Eagle appealed, questioning the district court's exercise of diversity jurisdiction over the declaratory relief action. The Ninth Circuit determined that the district court incorrectly exercised its jurisdiction by not applying the discretionary analysis required under the Declaratory Judgment Act but found the error to be harmless since the case had concluded and the district court had correctly decided the merits of the case according to state law. The court affirmed the district court's decision, confirming that diversity jurisdiction was properly established. The underlying state action, Pieri-Debbas v. Aero-Crete, resulted in a defense verdict for Aero-Crete and is now concluded.

Aero-Crete initiated a state court action against Charter Oak in the San Diego Superior Court, claiming damages for Charter Oak's failure to defend it in a cross-complaint. The allegations included breach of the implied covenant of good faith and fair dealing, interference with economic advantage and contractual relationships, malicious prosecution, abuse of process, and a request for declaratory relief. Charter Oak subsequently removed this case to the United States District Court for the Southern District of California. This appeal involves Golden Eagle's challenge to the district court's summary judgment decision in its own declaratory relief action against Charter Oak, filed under California's declaratory relief statute (California Code of Civil Procedure Section 1060).

Upon removal, the case remained one for declaratory relief, but the determination of whether to exercise federal jurisdiction became a procedural issue governed by federal law. The Declaratory Judgment Act (28 U.S.C. § 2201) is the relevant procedural statute, which does not itself establish federal subject matter jurisdiction; this must be based on diversity of citizenship (28 U.S.C. § 1332). The district court had subject matter jurisdiction due to the parties meeting the diversity requirements. However, the court also had the discretion to remand the case to state court, despite having jurisdiction. Federal courts are generally obligated to exercise jurisdiction but can abstain under certain circumstances, as established in Brillhart v. Excess Ins. Co. of America. The Supreme Court clarified that the Declaratory Judgment Act provides an opportunity for relief, rather than imposing a duty to hear the case, allowing district courts to dismiss or stay such actions based on considerations of judicial economy and practicality.

In Wilton v. Seven Falls Co., the court emphasized that federal jurisdiction over state law declaratory relief claims should generally be avoided during ongoing related state court proceedings, particularly in insurance coverage disputes. While the existence of a parallel state proceeding is a significant factor in deciding whether to exercise jurisdiction, its absence does not preclude the district court from declining to hear the case. The court clarified that discretion exists even without parallel proceedings and that a remand is appropriate if the district court does not indicate it considered jurisdictional issues. In Karussos, the district court failed to assess whether to exercise jurisdiction before addressing the merits, leading to a vacated decision and remand with instructions to dismiss due to a lack of supporting circumstances for federal jurisdiction.

In the current case, the parties sought a merits resolution rather than a remand for discretion exercise. However, the court found no circumstances justifying federal jurisdiction, noting that similarities in factual circumstances between state and federal proceedings are sufficient for determining parallelism. Charter Oak's argument that the case's removal from state to federal court negated the district court's discretion to remand was rejected, aligning with the court's previous rulings.

The Declaratory Judgment Act allows federal district courts the discretion to dismiss cases even if they meet subject matter jurisdiction requirements. Removal from state court does not affect this discretion. Supreme Court and federal appellate decisions confirm that district courts can remand cases to state courts for reasons beyond those outlined in 28 U.S.C. § 1447(c). Charter Oak's argument that Golden Eagle's suit primarily seeks damages, making the declaratory relief claim unnecessary, was rejected as similar claims have been determined in prior cases (Karussos). The action is fundamentally for declaratory relief, with monetary claims dependent on a favorable outcome for that relief. Charter Oak's assertion that a related federal case makes dismissal inefficient was also dismissed, as jurisdiction is assessed based on the filing time, not the appeal time. The district court should have exercised its discretion to decline this action; its failure to do so constituted an error. Although the court previously ruled correctly in Robsac by granting summary judgment for the insurer, the current case showed an abuse of discretion warranting a remand to the district court for dismissal.

A district court may improperly exercise jurisdiction when granting a declaratory judgment, but if it reaches a correct decision on the merits, vacating the judgment could waste judicial resources. In this case, despite the district court's jurisdictional error, it correctly granted summary judgment by applying relevant state law to undisputed facts, leading to the right outcome. The appellate court, applying Rule 61 of the Federal Rules of Civil Procedure and the principle of harmless error, chose not to reverse the district court's judgment, as doing so would only require the case to be retried in state court without any change in outcome. 

The appellate review of the summary judgment is de novo, focusing on whether there are disputed material facts and if the law was correctly applied. Under California law, an insurer has a broad duty to defend against any suit with potential coverage under its policy, which is more extensive than its duty to indemnify. This duty is assessed by comparing the complaint's allegations with the policy terms and may include extrinsic evidence to determine potential coverage. Golden Eagle presented several pieces of extrinsic evidence, including letters and a chart related to alleged concrete failures, to support its claim of potential coverage.

Charter Oak's insurance policy defines "property damage" in two ways: (1) as physical injury or destruction of tangible property occurring during the policy period, including any resulting loss of use, and (2) as loss of use of tangible property not physically injured if the loss is caused by an occurrence during the policy period. The policy includes specific exclusions: Exclusion N denies coverage for property damage to the insured's products arising from those products; Exclusion A(2)(d) excludes damage to property being worked on by the insured or requiring repair due to faulty workmanship; and Exclusion A(3) denies coverage for damage to work performed by the insured or related materials. California courts have ruled that an insured's faulty workmanship does not constitute "property damage," meaning repairs for such work are considered business risks, not covered losses. The evidence provided indicates defective workmanship, which is excluded under the policy. The necessary repairs to the concrete floors, as indicated in the chart, cannot establish coverage where none exists. The court concludes that neither the underlying complaint nor extrinsic evidence suggests coverage under any Charter Oak policy, and thus the district court's judgment is upheld. Although the district court improperly exercised jurisdiction, this error was harmless as the outcome would remain unchanged if the case were remanded to state court, avoiding unnecessary legal proceedings.

The court affirmed the decision, noting that Travelers was mistakenly sued as Travelers Companies. Aero-Crete, participating as amicus, endorsed the arguments presented by Golden Eagle, referencing the Circuit Advisory Committee's note regarding Rule 29-1. The case referenced, Dale Village Apartment Co. v. Pieri-Debbas Enterprises, was identified with San Diego Superior Court Case No. N54313. In the precedent case of Aero-Crete, Inc. v. The Travelers Ins. Co., the court highlighted that the abstention rule in declaratory relief actions did not apply because the action was removed from state court rather than filed in federal court while the state case was ongoing. The decision in Kirkbride v. Continental Casualty was distinguished by the subsequent Supreme Court ruling in Wilton and noted that Kirkbride dealt with the FDIC's removal authority, which is broader under FIRREA, emphasizing Congress's intent for FDIC-related cases to generally be adjudicated in federal courts. Additionally, the district court's summary judgment was partly based on Charter Oak's argument that the alleged "occurrence" happened after the expiration of its policies. The court referred to Chemstar, Inc. v. Liberty Mutual Ins. Co. for the principle that property damage under liability policies is deemed to occur when it becomes apparent to property owners. Golden Eagle's claim that the "continuous trigger" theory is more applicable than the "manifestation" theory was noted, but the court indicated it was unnecessary to resolve this dispute for their decision. It recognized that post-Chemstar, the California Supreme Court upheld the continuous trigger theory for third-party insurance disputes involving standard "occurrence" language in policies.