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West American Insurance Co. v. Atyani

United States District Court, D. New Mexico

September 4, 2018

WEST AMERICAN INSURANCE COMPANY and PEERLESS INDEMNITY INSURANCE COMPANY, Plaintiffs,
v.
HAILEY ATYANI, NICHOLE C DE BACA, BIANCA GARCIA, HANNAH JIRON, CESELLA MERRYMAN, ANDREA VARELA, WHITNEY WHITSON, JAEDA CHAVEZ, JENNA ESPINOZA, SAMANTHA HAWLEY, KRISTEN HERRERA, EMILLEE JEPHSON, GENEVIEVE REILLY, KELSI SHARP, ALLYNA BOWSHER, DENNIS BONFANTINE, JANICE BONFANTINE, D.B. KELLY, INC., d/b/a KELLY'S BREW PUB AND RESTAURANT and DB BREWERY LLC, Defendants.

          MEMORANDUM OPINION AND ORDER

          ROBERT C. BRACK SENIOR U.S. DISTRICT JUDGE.

         This matter is before the Court on Defendants Dennis Bonfantine, Janice Bonfantine, D.B. Kelly, Inc., d/b/a Kelly's Brew Pub and Restaurant and DB Brewery LLC's (collectively, "the Kelly's Defendants") Motion to Dismiss. (Doc. 15.)[1]Jurisdiction arises under 28 U.S.C. § 1332. The Kelly's Defendants and Plaintiffs West American Insurance Company and Peerless Indemnity Insurance Company (collectively, "Plaintiffs") dispute whether several insurance policies require Plaintiffs to indemnify and cover defense costs in two state court actions. These underlying actions involve former employees who allege the Kelly's Defendants violated the City of Albuquerque Minimum Wage Ordinance ("MWO"). The Kelly's Defendants urge the Court to decline to exercise its jurisdiction here because facts relevant to the scope of insurance coverage have yet to be developed in the pending state court case. But Plaintiffs are not parties to the pending state case, and the issue of insurance coverage has not been addressed in that case. Having considered counsel's submissions and the five Mhoon factors laid out by the Tenth Circuit to determine when a federal court should exercise its jurisdiction in claims for declaratory relief, the Court will DENY the motion to dismiss.

         BACKGROUND

         In April 2016, former employees of Kelly's Brew Pub sued the Kelly's Defendants in state court, alleging that the defendants had been violating the MWO by withholding servers' earned tip money, not paying servers the tipped minimum wage, and failing to keep required payroll records. (See Doc. 1 (Plaintiffs' Complaint) ¶¶ 37, 39-45.) That case-Atyani v. Bonfantine-is currently pending in the Second Judicial District Court, Bernalillo County, New Mexico. See D-202-CV-2016-02775. In February 2017, a different former employee filed a similar suit against the Kelly's Defendants alleging similar violations of the MWO. See Frank v. Bonfantine, D-202-CV-2017-00852. In November 2017, the state court dismissed Frank with prejudice. Id., Stipulated Order Granting Dismissal with Prejudice (2nd Judicial Dist, Bernalillo Cty., N.M. Nov. 13, 2017).

         Plaintiffs issued various insurance policies to DB Brewery LLC d/b/a Kelly's Brew Pub, and the policies were in effect during the period when the alleged MWO violations occurred. (See Compl. ¶¶ 32-34.) The policies cover bodily injury and property damage if the injury or damage "is caused by an 'occurrence' that takes place in the 'coverage territory.'" (Id. ¶ 36.) The policies specifically exclude bodily injury and property damage that is "expected or intended from the standpoint of the insured." (Id.) The policies define an "occurrence" as an "accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Id.) "Property damage" is defined as "[p]hysical injury to tangible property, including all resulting loss of use of that property" or "[l]oss of use of tangible property that is not physically injured." (Id.) The Kelly's Defendants sought defense costs and indemnity under these policies to resolve the claims against them in Frank and Atyani. (Id. ¶ 51; Doc. 13-1, Ex. A.) Plaintiffs denied coverage in both cases on the basis that the allegations of wage withholding and other MWO violations involve neither bodily injury nor property damage and are otherwise excluded from policy coverage. (See Compl. ¶¶ 52, 57-61.)

         The Kelly's Defendants argue that resolution of certain factual disputes in Atyani-e.g., whether the alleged tip withholding occurred at all or occurred intentionally-could resolve so that the underlying action would fall within the scope of the policies' property damage coverage. (See Doc. 15 at 4-5.) The bulk of the Kelly's Defendants' Motion to Dismiss (see Id. at 4-6) and Reply in Support of Motion to Dismiss (see Doc. 42 at 5-9) reiterates their argument that this Court should decline to issue a declaratory judgment regarding coverage before the state court case has more fully developed the facts in dispute.

         DISCUSSION

         The Declaratory Judgment Act vests federal courts with the power to "declare the rights and other legal relations of any interested party seeking such declaration." 28 U.S.C. § 2201. The Supreme Court has repeatedly affirmed the discretionary and "nonobligatory nature" of declaratory relief. See, e.g., Wilton v. Seven Falls Co., 515 U.S. 277, 286-88 (1995) ("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."); Pub. Serv. Comm'n of Utah v. Wycoff Co., 344 U.S. 237, 241 (1952) ("[The Act] confers a discretion on the courts rather than an absolute right upon the litigant.")

         While declaratory relief is clearly discretionary, the Tenth Circuit has expressly emphasized the utility of such relief in insurance coverage disputes. See W. Cas. & Surety Co. v. Teel, 391 F.2d 764, 766 (10th Cir. 1968) ("[A] declaratory action by an insurer to establish nonliability under casualty insurance [is] one of the prime purposes of the Declaratory Judgment Act."); Farmers All. Mut. Ins. Co. v. Jones, 570 F.2d 1384, 1386 (10th Cir. 1978) ("We have expressly recognized that one of the primary functions of the Act is to provide the [insurer] such a forum." (citation omitted)).

         When a parallel state court action might address some or all of the coverage issues presented in a federal claim for declaratory relief, courts in the Tenth Circuit look to the five factors laid out in State Farm Fire & Casualty Co. v. Mhoon to determine which forum would best settle the controversy. See 31 F.3d 979, 983 (10th Cir. 1994). The factors include:

[1] whether a declaratory action would settle the controversy; [2] whether it would serve a useful purpose in clarifying the legal relations at issue; [3] whether the declaratory remedy is being used merely for the purpose of "procedural fencing" or "to provide an arena for a race to res judicata "; [4] whether use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction; and [5] whether there is an alternative remedy which is better or more effective.

Id. These factors are balanced to guide the court's analysis-no one factor is dispositive. See United States v. City of Las Cruces, 289 F.3d 1170, 1183 (10th Cir. 2002). Here, an analysis of the Mhoon factors suggests that the Court should exercise its jurisdiction and deny the Kelly's Defendants' Motion to Dismiss.

         First and Second Mhoon Factors: Settling the Controversy and Clarifying Legal Relations

         The degree of similarity between the federal declaratory judgment proceeding and the underlying state court proceeding is relevant to the analysis of each Mhoon factor. The first and second factors, in particular, "are necessarily driven by the degree of identity of parties and issues in the concurrent proceedings." See Id. "[T]he likelihood a declaratory judgment will resolve the immediate dispute between the parties may tip the scales in favor of exercising jurisdiction[, ] . . . [while] the existence of outstanding claims in a parallel state court action may counsel a different conclusion." Mid-Continent Cas. Co. v. Vill. at Deer Creek Homeowners Ass'n, Inc.,685 F.3d 977, 982 n.3 (10th Cir. 2012). Whether a court's analysis of these factors should focus on just the controversy between the federal parties or consider additional parties to the state suit ...


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