Court: District Court, E.D. Virginia; March 18, 2019; Federal District Court
Mark S. Davis, Chief United States District Judge, denied Bryan Polli's motion to set aside the entry of default against White Pines, Inc., which has not participated in the case. The court ordered Plaintiff Penn-America Insurance Company to demonstrate within ten days why it should maintain jurisdiction over the matter. The factual background outlines that Polli, a manager at L.A.'s Night Club owned by White Pines, filed a lawsuit on March 22, 2018, following injuries sustained during an altercation at the club. After Polli's complaint, White Pines sought coverage from Penn-America under a commercial general liability policy, which was subsequently denied on May 31, 2018. Polli sent a demand letter on August 28, 2018, which was also denied by Penn-America on September 11, 2018. Penn-America filed a declaratory judgment action against White Pines without notifying Polli, who learned of this action on November 29, 2018, after default had been entered against White Pines. On December 5, 2018, Polli filed motions to intervene, transfer, and set aside the default, proposing a counterclaim for a declaration of Penn-America's duty to defend and indemnify White Pines related to Polli's original case.
Penn-America responded to the Motion to Transfer and the Motion to Set Aside Entry of Default but did not address the Motion to Intervene. On February 1, 2019, the Court granted both the motion to intervene and the motion to transfer, resulting in the case being moved to the Norfolk Division with a new case number. The discussion centers on Polli's motion to vacate the entry of default against co-defendant White Pines. The question arises whether Polli, as a defendant-intervenor, has standing to challenge the default on behalf of White Pines. While the Federal Rules of Civil Procedure do not specify which party may move to set aside a default, case law indicates that a non-defaulting defendant can have standing if there is a close relationship with the defaulting party. However, Polli's connection to White Pines—serving only as a manager—does not establish such a relationship. Consequently, even if Polli had standing, the outcome would not change. The Supreme Court's ruling in Frow v. De La Vega dictates that in multi-defendant cases with a default against one defendant, litigation should proceed among the non-defaulting parties while the default is held in abeyance. A final judgment against the defaulting defendant alone would be inappropriate. Courts emphasize that this allows litigation to continue without prejudice to the parties, although the defaulting defendant loses its standing and cannot participate in the trial.
The Frow case establishes that a default judgment cannot be entered against one defendant when the relief sought requires judgments against all defendants, thereby preventing inconsistent outcomes in cases of joint liability. This principle has been extended by some courts to situations with similarly situated defendants, even in the absence of joint liability, suggesting that a default judgment should not be granted if a non-defaulting defendant prevails on the merits. Courts, including the Fourth Circuit, have recognized that the rationale for avoiding inconsistent judgments applies to multiple parties and claims. In the current case, granting a declaratory judgment in favor of either Penn-America or Polli could result in inconsistent outcomes depending on the success of Polli's counterclaim against White Pines. Consequently, Polli's motion to set aside the default against White Pines is denied due to lack of standing and the implications of the Frow decision, which allows non-defaulting parties to continue litigation. The court acknowledges the procedural complexities stemming from the competing actions of Penn-America and Polli.
Declaratory judgment jurisdiction is established under 28 U.S.C. § 2201, allowing U.S. courts to declare the rights and legal relations of interested parties in cases of actual controversy. Such declarations carry the force of a final judgment and are reviewable. Federal courts have discretion, not an obligation, to hear cases seeking declaratory judgments, as clarified in *Brillhart v. Excess Ins. Co. of Am.* The court can raise abstention issues sua sponte, as recognized in *Louisiana Power & Light Co. v. City of Thibodaux*. The Fourth Circuit outlines factors for courts to consider in exercising this discretion, including the state's interest in resolving issues in state courts, the efficiency of resolution in the state court, potential entanglement between federal and state systems, and whether the federal action is being used for procedural advantage.
In the present case, Penn-America seeks declarations regarding its duty to defend or indemnify White Pines under an insurance policy and the Virginia worker's compensation scheme. The court finds that Penn-America has no such duty, as the claims do not pertain to a 'personal and advertising injury' as defined in the policy, and the Virginia Worker's Compensation Act provides the exclusive remedy for the damages sought. The Fourth Circuit has previously ruled that district courts should not decline jurisdiction in cases where an insurer questions its duty to defend or indemnify under an insurance policy.
Virginia law establishes that an insurer's duty to defend arises whenever the allegations in a complaint suggest facts that could fall within the coverage of the insurance policy, as articulated in the "four corners rule." This rule allows courts to determine the duty to defend without resolving factual disputes, focusing solely on the allegations in the complaint compared to the policy language. If it is evident that the insurer would not be liable for any judgment based on the allegations, there is no duty to defend. In contrast, the duty to indemnify is narrower and depends on litigated facts rather than mere allegations.
If a court finds no duty to defend, it also concludes there is no duty to indemnify. Conversely, if there is a duty to defend, the court may defer the issue of indemnification until the underlying case is resolved. In the present case, Penn-America seeks declarations regarding its obligations under the insurance policy and Virginia's worker's compensation statute. While the court can assess whether the policy covers worker's compensation, it cannot rely solely on the complaint's language for other declarations, such as the exclusivity of worker's compensation as a relief avenue, since that requires analysis beyond the complaint's four corners. Penn-America has no duty to defend or indemnify White Pines concerning the claims in the lawsuit under Coverage A, as they are excluded by the Policy's Workers' Compensation and Similar Laws Exclusion.
Under Virginia Code § 65.2, injured employees cannot pursue tort claims against their employers, as workers' compensation statutes provide the exclusive remedy. Exceptions exist when the injury is unrelated to the employment context, allowing for tort claims. Employers must meet specific statutory criteria, such as securing workers' compensation insurance, to maintain immunity from tort liability. In a case involving declaratory judgment sought by Penn-America, the court must determine if the underlying tort arose from the employment relationship, if Polli meets the statutory definition of an employee, if White Pines qualifies as an employer, and if it complied with the workers' compensation requirements. These factual inquiries may overlap with defenses in related state litigation, raising concerns about duplicative proceedings. The court also addresses the issue of "procedural fencing," noting that Penn-America filed for declaratory judgment in federal court after Polli indicated intent to file in state court, which undermines jurisdictional appropriateness. The court denies a motion to set aside a default and orders Penn-America to justify the exercise of jurisdiction within ten days, with responses allowed from the defendant within seven days thereafter. The Supreme Court has altered the review standard for jurisdiction in declaratory actions to a liberal abuse of discretion standard, while the Nautilus factors still apply. Additionally, the existence of an underlying state tort claim does not necessitate the assertion of jurisdiction by the court.
A district court is not deemed to exceed its discretion when dismissing a declaratory judgment action without a concurrent state court case. Under Virginia Code § 8.01-267.5, Penn-America could be added to a related case or a new action could be initiated, while Virginia Code § 8.01-184 allows courts to issue declaratory judgments. Polli's counterclaim requests declarations that Penn-America is obligated to defend and indemnify White Pines based on claims of 'bodily injury' from an 'occurrence' and from the use of reasonable force to protect persons or property. The excerpt highlights a noted conflict in Fourth Circuit decisions regarding the jurisdiction over declaratory judgment actions related to indemnification in state court cases. Citing precedents, it emphasizes the reluctance of federal courts to intervene in matters of state law without significant federal interest, advising against piecemeal trials. The pursuit of state law declarations in federal court by insurance entities does not provide a compelling reason for federal jurisdiction.
