"vouching-in" procedure under U.C.C. § 2-607(5)(a) had already established a basis for holding the manufacturers liable in a subsequent proceeding. See Step-Saver, 912 F.2d at 647-650.
As to the first Step-Saver factor, adversity, the analysis pulls in two different directions. In contrast to Step-Saver, Home has denied that it is required to indemnify Perlberger. However, the adversity of the parties' interests as to the duty to indemnify will not be complete until after the resolution of the state-court action, when it will be clear whether Perlberger can assert a claim for indemnity from Home. This court need not, however, decide whether the fact that Home has given notice to Perlberger that it will not indemnify him suffices to render the parties' interests adverse for ripeness purposes, since the "conclusiveness" stage of the ripeness analysis is determinative.
To turn to that analysis, a declaratory judgment would not conclusively resolve the dispute between Home, Perlberger, and Strausser as to the "wrongful acts" and "innocent party" provisions, or as to whether it would be contrary to public policy for Home to indemnify Perlberger. Home seeks to distinguish Step-Saver by arguing that Home's complaint does not present the type of contingent liability at issue in that case, as Strausser's state-court complaint provides a sufficient set of completed facts on which to base Home's complaint. In fact, however, Home's request for declaratory judgment seems to be more similar to that in Step-Saver than Home acknowledges. Plaintiff Step-Saver had sought a federal court declaration that, if the state-court suits against it found a defect that was attributable to the defendant manufacturers, the latter would be liable. Step-Saver did not, however, ask the federal court to decide whether Step-Saver or the manufacturers of the computer equipment had actually been responsible for the defect. In the view of the Third Circuit, this created the risk that, subsequent to the hypothesized declaratory judgment and the termination of the state-court litigation, yet a third round of litigation would be required to determine whether the state-court decisions were within the scope of the declaratory judgment. (Such a situation could, for instance, be presented if the state-court decisions did not clearly allocate blame for the defect between Step-Saver and the manufacturers.) This meant that the declaratory judgment would not be conclusive. See Step-Saver, 912 F.2d at 643. The Step-Saver court also observed that Step-Saver's request for a declaratory judgment amounted to a request for an advisory opinion, because Step-Saver sought a declaration as to a contingency.
The declaratory relief requested by Home seems to be similarly contingent. Consider what would occur if, in the pending state-court action, a jury were to reach a verdict for Strausser on her legal malpractice, breach of contract, breach of fiduciary duty, or unjust enrichment claims based either (a) only on a finding of negligent or reckless conduct by Perlberger, or (b) on unclear grounds. In the first case, the declaratory judgment would be irrelevant; in the second, its applicability would be uncertain, requiring further court proceedings. These are precisely the circumstances that led the Step-Saver court to find that a declaratory judgment in that case would not be conclusive. This court must come to the same conclusion.
For purposes of analytical completeness, the court will now consider the third element of the Step-Saver analysis, "utility". It appears that Home does indeed have an adequate case as to the utility of a declaratory judgment action. Home argues that the act of clarifying which claims are covered under its policy will facilitate settlement, avoiding the need for a prolonged jury trial. A similar argument was endorsed by the Third Circuit in ACandS, Inc. v. Aetna Casualty & Surety Co., 666 F.2d 819, 823 (3d Cir. 1981), which noted that "it would turn the reality of the claims adjustment process on its head to hinge justiciability of an insurance agreement on the maturation of a suit to a judgment when the overwhelming number of disputes are resolved by settlement. The respective interests and obligations of insured and insurers, when disputed, require determination much in advance of judgment since they will designate the bearer of ultimate liability in the underlying cases and hence the bearer of the onus and risks of settlement."
B. Home's "Prior Acts" and "Professional Services" Claims.
There is a strong possibility that a ruling by this court that Perlberger's conduct was outside the "prior acts" and "professional services" clauses of Home's policy, if it came before the conclusion of the state-court proceeding, would collaterally estop some aspects of that proceeding. If this court found that Perlberger did not render any professional services to Strausser after June 22, 1988, that finding could well preclude Strausser from making any claim of professional malpractice, breach of contract, or breach of fiduciary duty against Perlberger based on conduct occurring after that date. A finding that Perlberger did render professional services after June 22, 1988 could, correspondingly, result in preclusion adverse to Perlberger, possibly barring, for instance, a finding that Perlberger had no contract with Strausser during that period.
The courts have broad discretion to decline to entertain declaratory judgment proceedings during the pendency of parallel state-court proceedings. The extent and character of this discretion was first described by the Supreme Court in Brillhart v. Excess Insurance Co. of America, 316 U.S. 491, 86 L. Ed. 1620, 62 S. Ct. 1173 (1942), and was recently reaffirmed by the Court in Wilton v. Seven Falls Co., 132 L. Ed. 2d 214, 115 S. Ct. 2137 (1995). Brillhart involved a federal declaratory judgment action filed by an insurer in anticipation of a state-court garnishment proceeding in which it was to be a defendant. In that case, the Court found that the federal courts had discretion to decide whether or not to entertain an action under the Declaratory Judgment Act, and should decline to hear cases in which "the questions in controversy between the parties in the federal suit, and which are not foreclosed under the applicable substantive law, can better be settled in the proceeding pending in the state court." Brillhart, 316 U.S. at 495. Wilton, in reaffirming Brillhart, found that the test set forth by the Court in Colorado River Water Conservation District v. United States, 424 U.S. 800, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1976), under which a court may decline jurisdiction in favor of a pending state-court action only in "exceptional" circumstances, id. at 818-20, did not apply to declaratory judgment actions, Wilton, 115 S. Ct. at 2141-42.
The facts of Brillhart and Wilton were somewhat different from those at issue here. In those cases, the parallel state-court proceeding raised essentially the same legal issues, between the same parties, as were at issue in the federal proceeding. Here, the parallel state-court proceeding does not involve the same parties; Home Insurance is not a party to the state action. Moreover, the state-court proceeding will not necessarily resolve all of the legal issues before this court. It may do so, of course: for instance, as to those claims on which Perlberger prevails in the state-court action, the question of Home's duty to indemnify him will be moot. Likewise, if judgment is entered against Perlberger on Strausser's fraud claim, the "wrongful acts" exception may well apply directly, freeing Home of any obligation to indemnify Perlberger for any award of damages on that claim.
Brillhart and Wilton are not limited to their facts, however. Brillhart set forth a list of factors for courts to take into account in the exercise of their discretion to entertain declaratory judgment actions, but emphasized that future cases might reveal other relevant factors, 316 U.S. at 495; Wilton endorsed this view, see 115 S. Ct. at 2141. Panels of the Fourth and Sixth Circuits, both considering cases resembling that before this court and both applying the Brillhart standard, have found it inappropriate for a district court to entertain such actions. See Mitcheson v. Harris, 955 F.2d 235, 237-40 (4th Cir. 1992); American Home Assurance Co. v. Evans, 791 F.2d 61, 63 (6th Cir. 1986).
In Mitcheson tenants sued their landlord in state court for injuries allegedly caused by lead exposure on his property, and the landlord's insurer, after agreeing to defend its insured, filed a declaratory judgment action in federal court claiming that the lead poisoning was an "occurrence" that was not covered by the policy. The Sixth Circuit found that it was inappropriate for the district court to have heard the case, given the fact that it predominantly involved issues of state law that were most appropriately decided by the state itself, 955 F.2d at 237-38, and because of the interest in "resolving all litigation stemming from a single controversy in a single court system," id. at 239, and thereby avoiding, for instance, collateral estoppel of aspects of the state action by the federal action. A concurring opinion noted that a decision as to when the lead poisoning occurred for purposes of insurance coverage could significantly affect the state court action, and have preclusive effect, for instance, as to statute of limitations or laches defenses. See id. at 242 (Hall, J., concurring).
The facts of Evans are similar, and involved the question whether the conduct of an insured lawyer was within a malpractice insurance policy's "dishonesty" exclusion. 791 F.2d at 62. Evans applied a five-part test for the exercise of a district court's discretion to hear a declaratory judgment action; one of the included elements was "whether the use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction." Id. at 63.
The Evans test has been applied in the Eastern District of Pennsylvania, although in a case with facts somewhat different from those at issue here. See Nationwide Mutual Insurance Company v. Flynn, 704 F. Supp. 592, 594 (E.D. Pa. 1988).
Given the substantial risk that a pronouncement by this court on the applicability of the "prior events" and "professional services" clauses of Home's policy would have a preclusive effect on the pending state-court proceedings, this court will stay any consideration of those aspects of Home's complaint until the latter proceedings are concluded. See Wilton, 115 S. Ct. at 2143 n.2 ("We note that where the basis for declining to proceed is the pendency of a state proceeding, a stay will often be the preferable course, insofar as it assures that the federal action can proceed without risk of a time bar If the state case, for any reason, fails to resolve the matter in controversy.").
IV. Strausser's Counterclaim for Fees and Costs
Strausser argues that she is entitled to an award of legal fees and costs under New Jersey law, and, in the alternative, under Pennsylvania and federal law. Strausser provides no legal argument as to the basis for her request for costs, and the court will therefore disregard this request. Turning to Strausser's request for legal fees, the court finds that the Pennsylvania rule for attorney's fee awards, not the New Jersey or federal rule, applies. A federal court sitting in diversity is bound to apply the choice-of-law rules of the forum state, which in this case is Pennsylvania. See Klaxon Co. v. Stentor Electric Manuf. Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). There seems to be no room to doubt that the Pennsylvania courts would conclude that settled choice-of-law principles, applicable in Pennsylvania as in other states, would mandate the application of the substantive law of Pennsylvania to the central dispute in this action.
The substantive law of Pennsylvania also governs the subsidiary issue of attorney's fees. See First State Underwriters v. Travelers Ins. Co., 803 F.2d 1308, 1318 (3rd Cir. 1986).
In 1986, in First State, the Third Circuit predicted that the Pennsylvania courts would find that awards of attorney's fees are appropriate in cases of "bad faith" or "obdurate" behavior. See First State, 803 F.2d at 1318. And that prediction has been vindicated. See, e.g., Marino v. General Accident Ins. Co., 416 Pa. Super. 1, 9, 610 A.2d 477, 481 (1992). Strausser has not shown such behavior by Home in this case. Strausser argues that Home's complaint was filed with the sole purpose of delaying or interfering with the pending state-court action. This court does not agree; Home does have a valid interest in clarifying its duties to its insured, and, as the foregoing discussion suggests, it was by no means a legal certainty that the federal courts would decline to entertain Home's declaratory judgment action. Thus, Strausser's motion for an award of fees must be denied.
For the foregoing reasons, Home's request for a declaratory judgment as to the "prior acts" and "professional services" provisions of its policy will be stayed, and the remainder of Home's complaint will be dismissed.
There are a number of outstanding motions relating to discovery disputes in this matter. Because Home's complaint will be dismissed in part and stayed in part, discovery will cease, rendering these motions moot. Therefore, these motions will be dismissed.
An appropriate order accompanies this opinion.
For the reasons set forth in the memorandum filed herewith, it is ORDERED:
1. that Diane Strausser's Motion for Judgment on the Pleadings (doc. no. 14) is GRANTED in part and DENIED in part. Home Insurance Company's request for a declaratory judgment as to its duty to defend Norman Perlberger, Esq. is DISMISSED without prejudice; its request for a declaratory judgment as to its duty to indemnify Norman Perlberger is STAYED as to the "prior acts" and "professional services" provisions in Home's policy, and DISMISSED without prejudice as to the remaining provisions cited by Home;
2. that Home Insurance Company's Motion for Judgment on the Pleadings as to Diane Strausser's counterclaim for fees and costs (doc. no. 16) is GRANTED, and the counterclaim is DISMISSED;
3. that Home Insurance Company's Motion for a Protective Order (doc. no. 13), and Diane Strausser's Motion for a Protective Order, Sanctions, and Stay of Discovery (doc. no 20) are DISMISSED as moot.
September 26, 1995
Louis H. Pollak, J.