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Kelly v. Maxum Specialty Insurance Group

United States Court of Appeals, Third Circuit

August 21, 2017

RONALD KELLY; PATRICE KELLY, individually and as h/w

          Argued: November 3, 2016

         On Appeal from the United States District Court for the Eastern District of Pennsylvania (No. 2:14-cv-07149) District Judge: Honorable Joel H. Slomsky

          Sina Bahadoran (ARGUED) Michele A. Vargas Hinshaw & Culbertson LLP Counsel for Appellant Maxum Specialty Insurance Group.

          John Reed Evans (ARGUED) Selective Law Group, LLC 760 West Sproul Road Counsel for Appellees The Carman Corporation, The Carman Group, Inc., The Carman Group, LLC, and Sergius B. Carman.

          Michael O. Pansini Steven M. Mezrow Gregory J. Kowalski (ARGUED) Pansini & Mezrow Counsel for Appellees Ronald and Patrice Kelly.

          Before: CHAGARES, HARDIMAN, and SCIRICA, Circuit Judges.



         This case presents a situation familiar to our district courts. Two related lawsuits are pending - one each in state and federal court. The state action seeks to determine a defendant's liability for an alleged harm, and the federal action seeks only a declaratory judgment on an insurer's obligation to defend and indemnify the defendant. The District Court here exercised its discretion to abstain from entertaining the declaratory action under the Declaratory Judgment Act, 28 U.S.C. §§ 2201-02 ("DJA"), largely because it determined that the state court action concerning liability and the declaratory judgment action were parallel proceedings. The District Court further concluded that the remaining factors guiding the consideration of whether it should entertain the declaratory action weighed against retaining jurisdiction.

         Whether a state action parallels a federal action - in which case a district court has significant discretion under the DJA to decline a lawsuit seeking only declaratory relief - is a question that has divided the district courts in this Circuit. Although the question is not dipositive to a court's decision to abstain, it is important, and is one that courts must address. We hold that contemporaneous state and federal proceedings are parallel for purposes of the DJA when they are substantially similar, and the two proceedings here were not. We further hold that the lack of parallel state and federal proceedings - a significant factor favoring hearing the case - is not outweighed by other factors. For the reasons that follow, we will reverse the District Court's order and remand.


         In 2007, appellee Ronald Kelly's car collided with another vehicle driven by a drunk driver. The driver had been drinking at a bar, Princeton Tavern, owned by BBK Tavern, Inc. ("Princeton Tavern"), which was insured under a dram shop liability policy issued by State National Insurance Company ("State National"). The insurance policy had been procured by appellee Carman Corporation ("Carman"), Princeton Tavern's insurance broker.

         In 2009, Ronald and Patrice Kelly (collectively, "the Kellys") sued Princeton Tavern in state court seeking damages for injuries and economic losses caused by the collision. Kelly v. Siuma, Case No. 090503424 (Phila. Cty., Pa. Ct. Com. Pl. May Term 2009). The Kellys eventually obtained a default judgment against Princeton Tavern and settled for $5 million.

         When that lawsuit was filed, Princeton Tavern alerted its broker, Carman, and requested that Carman notify State National of the insurer's obligation under the dram shop policy to defend and indemnify Princeton Tavern. Carman did not do this. Lacking notice of the lawsuit, State National refused to cover Princeton Tavern's legal liability. After the Kellys secured the judgment, Princeton Tavern assigned to them the rights to sue Carman for its failure to notify State National about the litigation.

         In July 2013, the Kellys sued Carman in state court for negligence and breach of contract. Ronald & Patrice Kelly, as assignees of BBK Tavern, Inc. v. The Carman Corp., Case No. 4825 (Phila. Cty., Pa. Ct. Com. Pl. July Term 2013) (the "Tort Action"). While that case was proceeding, the Kellys filed a separate state-court action against Carman and its professional liability insurer, appellant Maxum Specialty Insurance Group ("Maxum"), seeking a declaratory judgment that Maxum was obligated to defend and indemnify Carman against the Tort Action claims.[1] Kelly v. Maxum Specialty Ins. Grp., Case No. 233 (Phila. Cty., Pa. Ct. Com. Pl. Dec. Term 2014) (the "Declaratory Action").

         Maxum removed the Declaratory Action to the District Court under 28 U.S.C. § 1441, asserting diversity jurisdiction pursuant to 28 U.S.C. § 1332. Although the Kellys and Carman are Pennsylvania citizens, Maxum - a Georgia company - argued that the Kellys and Carman are together interested in securing Maxum's coverage for Carman's potential liability. Therefore, according to Maxum, diversity of citizenship (and thus federal jurisdiction) would exist once Carman was properly realigned to join the Kellys as a plaintiff.

         The Kellys moved to remand the Declaratory Action to state court. They argued that they and Carman do not have the same interests and should not be realigned to secure diversity jurisdiction. They also requested alternatively that the District Court exercise its discretion under the DJA to decline jurisdiction. Maxum opposed the motion, and Carman filed a response in support of remand.[2]

         Weighing the factors for deciding whether to abstain from entertaining declaratory judgment actions set forth in Reifer v. Westport Insurance Corp., 751 F.3d 129, 143-46 (3d Cir. 2014), the District Court sided with the Kellys and Carman. The Court's conclusion rested heavily on its determination that the still-pending state Tort Action constituted a parallel proceeding to the Declaratory Action. By order issued on September 29, 2015, the District Court declined to hear the lawsuit and remanded the action to state court. With the motion resolved, the Court did not address whether realignment of the parties to secure diversity jurisdiction was proper. Maxum timely appealed.



         A district court's discretionary remand in a declaratory judgment action is a final decision that is appealable under 28 U.S.C. § 1291.[3] Reifer, 751 F.3d at 133. We review the District Court's decision for abuse of discretion. Id. at 137-39. In doing so, we review legal questions, including the question of whether state court and federal court proceedings are parallel, de novo. See Nationwide Mut. Fire Ins. Co. v. George V. Hamilton, Inc., 571 F.3d 299, 307 (3d Cir. 2009).


         The Kellys seek a declaratory judgment, a remedy made available to the federal courts by the DJA.[4] That statute provides that federal courts "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." 28 U.S.C. § 2201(a) (emphasis added). Granting a declaratory judgment is therefore discretionary and a court may abstain from entertaining an action seeking only declaratory relief.[5] Reifer, 751 F.3d at 134 (citing Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494 (1942)); Wilton v. Seven Falls Co., 515 U.S. 277, 282 (1995) ("[D]istrict courts possess discretion in determining whether and when to entertain an action under the [D]A], even when the suit otherwise satisfies subject matter jurisdictional prerequisites."); see also Rarick v. Federated Serv. Ins. Co., 852 F.3d 223, 229 (3d Cir. 2017) (clarifying the extent of a court's discretion where a litigant seeks both declaratory and non-declaratory relief).

         The discretion courts exercise in actions seeking only declaratory relief is "substantial" but nonetheless "bounded and reviewable." Reifer, 751 F.3d at 140. On the one hand, courts may abstain based on "considerations of practicality and wise judicial administration." Wilton, 515 U.S. at 288. On the other hand, the "wholesale" dismissal of certain types of cases brought under the DJA is improper, as litigants should not be unjustifiably denied the right to obtain an authorized remedy in federal court. See Reifer, 751 F.3d at 147.

         We have directed courts deciding whether to entertain a declaratory action to weigh certain enumerated and other factors "bearing on the usefulness of the declaratory judgment remedy, and the fitness of the case for [federal] resolution." Id. at 138 (quoting Wilton, 515 U.S. at 289). This type of "uniform approach" is intended to "clarify for parties and district courts the relevant considerations to sound and reasoned discretion, as well as help properly focus our abuse of discretion review." Id. at 146.

         Courts should first determine whether there is a "parallel state proceeding." Id. at 143, 146. Although the existence of a parallel state proceeding is but one factor for courts to consider, it is a significant factor that is treated with "increased emphasis." Id. at 144; see also Sherwin-Williams Co. v. Holmes Cty., 343 F.3d 383, 394 (5th Cir. 2003) (noting that "the presence or absence of a pending parallel state proceeding is an important factor"); Aetna Cas. & Sur. Co. v. Ind-Com Elec. Co., 139 F.3d 419, 423 (4th Cir. 1998) ("[T]he existence of [a parallel state] proceeding should be a significant factor in the district court's determination. But it is not dispositive."). We have held, as a result, that "the absence of pending parallel state proceedings militates significantly in favor of exercising jurisdiction, although it alone does not require such an ...

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