                                                                                                                           Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


12-1-2000

State Auto Ins Co v. Summy
Precedential or Non-Precedential:

Docket 00-1116




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Recommended Citation
"State Auto Ins Co v. Summy" (2000). 2000 Decisions. Paper 241.
http://digitalcommons.law.villanova.edu/thirdcircuit_2000/241


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Filed December 1, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 00-1116

STATE AUTO INSURANCE COMPANIES,

v.

ERIC SUMMY; JEFFREY ENCK, trading as E & J
RENTALS; BRYANT DIXON, a minor by and through his
parent and natural guardian, SHAWNA DIXON; SHAWNA
DIXON,

Eric Summy; Jeffrey Enck, trading as E & J Rentals,

       Appellants

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civ. No. 99-cv-1747)
District Judge: Honorable Eduardo C. Robr eno

Argued October 6, 2000

Before: BARRY, WEIS and ROSENN, Circuit Judges.

(Filed: December 1, 2000)
       John R. Trotman, Jr., Esquir e
        (ARGUED)
       Peter Russell Kohn, Esquire
       Monheit, Monheit, Silverman
        & Fodera, P.C.
       Eleven Penn Center, Suite 1101
       1835 Market Street
       Philadelphia, Pennsylvania 19103

       Attorneys for Appellants

       Jonathan C. Deisher, Esquire
        (ARGUED)
       Post & Schell, P.C.
       1245 South Cedar Crest Boulevard
       3rd Floor
       Allentown, Pennsylvania 18103

       Attorneys for Appellee

       Laura A. Foggan, Esquire
       Daniel E. Troy, Esquire
       Erin N. McGonagle, Esquire
       Wiley, Rein & Fielding
       1776 K Street, N.W.
       Washington, D.C. 20006

       Attorneys for Amicus Curiae
       Insurance Environmental Litigation
       Association

OPINION OF THE COURT

WEIS, Circuit Judge.

Despite the pendency of a case in state court on the
same issues, the District Court granted a declaratory
judgment in favor of an insurance carrier on a coverage
case based solely on state law. We conclude that in the
circumstances, the District Court should have declined to
exercise jurisdiction. Accordingly, we will vacate the
judgment and direct that the complaint be dismissed.

Underlying this controversy is a suit for damages brought
on behalf of Bryant Dixon, a child who allegedly was

                                  2
poisoned by lead paint in his home, a structur e owned and
leased by E & J Rentals. Dixon's complaint against E & J
was filed in the Court of Common Pleas of Lancaster
County, Pennsylvania on March 12, 1999. After r eceiving
notice of the impending suit, E & J notified State Auto
Insurance Co., its liability carrier, of the claim. State Auto
advised E & J that the policy's pollution exclusion applied
to preclude coverage and, consequently, E & J would have
no insurance protection against the Dixon claim.

On March 23, 1999, E & J's attorney sent a letter to
State Auto, disagreeing with its denial of coverage and
advising that he intended to ask for a declaratory judgment
in state court to resolve the matter. State Auto responded
by filing the present declaratory judgment action in the
District Court for the Eastern District of Pennsylvania on
April 7, 1999.

On June 11, 1999, E & J moved to dismiss or stay the
federal action, arguing that the court should, in its
discretion, decline to exercise jurisdiction over the matter.
Three days later, E & J filed its own suit for declaratory
judgment in state court. State Auto moved to dismiss the
state suit; both parties filed motions for summary judgment
in the two courts. After briefing that vigor ously contested
jurisdiction, the District Court denied E & J's motion to
dismiss or stay on August 25, 1999 without stating its
reasons for doing so.

On January 28, 2000, the District Court granted State
Auto's motion for summary judgment.1 E & J has appealed,
challenging the decision of the District Court to adjudicate
the declaratory judgment. E & J also argues the merits of
the coverage issue.

Generally speaking, insurance companies include
pollution exclusions in their liability policies to shield
themselves from claims for injuries caused by exposure to
harmful substances, irritants, contaminants, or chemicals
as defined more precisely in the policies. The interpretation
_________________________________________________________________

1. On February 10, 2000, based on res judicata, the state trial court
denied E & J's motion for summary judgment in its declaratory
judgment action.

                               3
of these clauses, particularly in lead poisoning cases
similar to Dixon's, has resulted in extensive litigation in
state and federal courts throughout the country. No
consensus on the interpretation and scope of the
exclusionary clauses has emerged among courts nationally,
nor in Pennsylvania, whose law applies here.

At the time the District Court denied E & J's motion to
dismiss, only two Pennsylvania trial courts had ruled on
this issue. See Fayette County Hous. Auth. v. Housing &
Redev. Ins. Exch., No. 2440-1997, slip op. (C. P . Fayette Co.
(Pa.) Apr. 7, 1999); Lititz Mut. Ins. Co. v. Steely, No. 1044-
1997, slip op. (C. P. Lancaster (Pa.) Apr . 17, 1998). Both
courts held that pollution exclusion clauses similar to the
one at issue here were ambiguous, and ther efore the
insurers were required to defend and indemnify the insured
property owners.

In the interim between the District Court's denial of E &
J's motion to dismiss and the grant of summary judgment
for State Auto, the Pennsylvania Superior Court, in a 2-1
decision, reversed the order of the Court of Common Pleas
of Lancaster County, and ruled in favor of the insur er. Lititz
Mut. Ins. Co. v. Steely, 746 A.2d 607 (Pa. Super . 1999). The
policyholders in Lititz have since petitioned the state
supreme court for allocatur.

The other Common Pleas case, Fayette County Housing
Authority, also came before the Superior Court. Rather than
following Lititz, the Superior Court sua sponte ordered
rehearing en banc of the decision fr om the Court of
Common Pleas of Fayette County. Fayette County Hous.
Auth. v. Housing & Redev. Ins. Exch., No. 693-WDA-99,
Order (Pa. Super. Ct. March 9, 2000). The case was argued
in September 2000.

United States District Courts within this cir cuit also have
examined the pollution exclusion's application to lead
poisoning cases, with varying results.2
_________________________________________________________________

2. The following cases held that pollution exclusions applied to preclude
coverage: St. Leger v. American Fire and Cas. Co., 870 F. Supp. 641 (E.D.
Pa. 1994), aff'd w/o opinion, 61 F .3d 896 (3d Cir. 1995); Kaytes v.
Scottsdale Ins. Co., No. 97-3225, 1997 WL 763022 (E.D. Pa. Dec. 9,

                               4
I.

The Declaratory Judgment Act, 28 U.S.C. SS 2201 and
2202, provides a remedy that may be used by the federal
courts in appropriate circumstances. This statute provides
that a court "may declare the rights. . . of any interested
party," 28 U.S.C. S 2201(a) (emphasis added), and
contemplates that district courts will exercise discretion in
determining whether to entertain such actions.

The unique characteristics of the Act werefirst made
clear by the Supreme Court in Brillhart v. Excess Insurance
Co. of America, 316 U.S. 491, 495 (1942), a case involving
a dispute between insurance carriers. The Court
emphasized that the jurisdiction conferred by the Act was
discretionary, and district courts were under no compulsion
to exercise it. Id. at 494.

       "Ordinarily it would be uneconomical as well as
       vexatious for a federal court to proceed in a declaratory
       judgment suit where another suit is pending in a state
       court presenting the same issues, not gover ned by
       federal law, between the same parties. Gratuitous
       interference with the orderly and comprehensive
       disposition of a state court litigation should be
       avoided."

Id. at 495.

After articulating the rationale, the Court listed specific
factors for district judges to consider in deciding whether to
hear declaratory judgment actions. A critical question,
according to the Court, was "whether the questions in
controversy between the parties to the federal suit, and
which [were] not foreclosed under the applicable
substantive law, can better be settled in the pr oceeding
pending in the state court." Id. Naturally, this requires
some inquiry into the scope of the state court pr oceeding,
_________________________________________________________________

1997); Kaytes v. Imperial Cas. & Indem. Co., No. 93-1573, 1994 WL
78090 (E.D. Pa. Jan. 7, 1994). Contra Nationwide Mut. Ins. v. Fair, No.
96-1975 (W.D. Pa. Oct. 3, 1997) (holding that pollution exclusion was
ambiguous and that insurer was obligated to defend and indemnify
insured.).

                               5
the nature of defenses available there, and whether the
claims of all parties in interest can satisfactorily be
adjudicated in that proceeding. Id.; see also Edwin
Borchard, Discretion to Refuse Jurisdiction of Actions for
Declaratory Judgments, 26 Minn. L. Rev. 677 (1942)
(observing that district courts are not obliged to exercise
jurisdiction in declaratory judgment actions and concluding
that refusal to exercise jurisdiction is proper where issues
before state and federal courts are substantially the same
and entertaining action would only duplicate judicial effort).

The discretionary nature of the declaratory judgment
remedy became somewhat clouded after Colorado River
Water Conservation District v. United States , 424 U.S. 800
(1976). There, the Court proclaimed that federal courts
have a "virtually unflagging obligation" to exercise the
jurisdiction conferred on them by Congr ess. Id. at 817.

Although Colorado River was an abstention case involving
federal claims, some courts applied its restrictive teachings
to limit or abolish the discretion to deny declaratory
judgments. See, e.g., Terra Nova Ins. Co., Ltd. v. 900 Bar,
Inc., 887 F.2d 1213, 1221 (3d Cir . 1989) (listing cases in
which Colorado River test was applied in declaratory
judgment context). Notably, in Terra Nova , this Court
disagreed with that approach. Id. at 1222. After exploring
the ramifications of Colorado River and Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1
(1983) (holding that a district court may not grant a stay
pending arbitration absent exceptional circumstances), we
concluded that neither case diminished the jurisdictional
discretion contained in the Declaratory Judgment Act, and
that Brillhart retained its vitality. Terra Nova, 887 F.2d at
1223.

Because of lingering confusion among the courts over
whether Colorado River eroded Brillhart, the Supreme Court
revisited the issue in Wilton v. Seven Falls Co., 515 U.S.
277, 279, 281 (1995). Reviewing the declaratory judgment
remedy at some length, the Court reaffir med Brillhart's
standard of broad discretion and r ejected Colorado River's
restrictive "exceptional circumstances" test as inappropriate
for the Declaratory Judgment Act. Id. at 286. As Wilton
phrased it, "[i]n the declaratory judgment context, the

                               6
normal principle that federal courts should adjudicate
claims within their jurisdiction yields to considerations of
practicality and wise judicial administration." Id. at 288.
The statute "confers a discretion on the courts rather than
an absolute right upon the litigant." Id. at 287.

Wilton's emphasis upon "practicality" and "wise judicial
administration" echoes Brillhart's specific admonition: "It is
not our function to find our way through a maze of local
statutes and decisions on so technical and specialized a
subject [matter] . . . . For one thing, it is too easy to lose
our way." Brillhart, 316 U.S. at 497. The Court concluded
that district court decisions should be reviewed under an
abuse of discretion standard in actions for "declaratory
relief where parallel proceedings, pr esenting opportunity for
ventilation of the same state law issues, wer e underway in
the state court." Id. at 290.3

Two years after Terra Nova, in United States v.
Commonwealth of Pennsylvania, Department of
Environmental Resources, 923 F .2d 1071, 1075 (3d Cir.
1991), we applied a limiting factor from Brillhart to draw a
distinction between declaratory judgment actions that
district courts should entertain, and those in which
jurisdiction ought to be declined. We concluded that the
District Court did not have open-ended discr etion to decline
jurisdiction over a declaratory judgment action when the
issues included federal statutory interpretation, the
government's choice of a federal forum, an issue of
sovereign immunity, or inadequacy of the state proceeding.
Id. at 1076-79. That case was quite differ ent from Brillhart,
where the declaratory judgment action was r estricted to
issues of state law.

For cases like Brillhart, where district courts must decide
whether to hear declaratory judgment actions involving
insurance coverage issues, we have suggested r elevant
considerations:

       1. A general policy of restraint when the same issues
       are pending in a state court;
_________________________________________________________________

3. We have applied Wilton's standard of discretion to interpleader actions
as well. See NY Life Distributors, Inc. v. Adher ence Group, Inc., 72 F.3d
371 (3d Cir. 1995).

                               7
       2. An inherent conflict of interest between an
       insurer's duty to defend in a state court and its
       attempt to characterize that suit in federal court as
       falling within the scope of a policy exclusion;

       3. Avoidance of duplicative litigation.

Department of Environmental Resour ces, 923 F.2d at 1075-
76 (discussing Terra Nova).4

These precedents counsel hesitation by federal courts in
exercising jurisdiction over declaratory judgment actions
when the state law involved is close or unsettled. See
Mitcheson v. Harris, 955 F.2d 235, 240 (4th Cir. 1992)
(noting that where there seemed to be equally relevant
statements by the state courts on either side of the issue,
it would be prudent to leave the question to be decided in
the state proceeding).5 A federal court should also decline to
exercise its discretionary jurisdiction when doing so would
promote judicial economy by avoiding duplicative and
piecemeal litigation. See id. at 239 (noting that "the
prospects for coordinated management and alleviation of
abrasion are greater when the litigation is handled under
one jurisdictional roof."). Moreover , district courts should
give serious consideration to the fact that they do not
establish state law, but are limited to pr edicting it. This is
especially important in insurance coverage cases, although
we do not mean to confine its relevance to that category.

In diversity matters, the federal courts are often called
upon to apply state law without the guidance of state
appellate rulings. To aid in the correct disposition of such
_________________________________________________________________

4. In Kiewit Eastern Co., Inc. v. L & R Construc. Co., Inc., 44 F.3d 1194,
1198 n.3 (3d Cir. 1995) the Court noted the discretionary factor in
declaratory judgment actions, but proceeded on the merits because none
of the parties contested that issue. Similarly in Nationwide Mutual Fire
Insurance Co. v. Pipher, 140 F.3d 222 (3d Cir. 1998) and Nationwide
Mutual Insurance Co. v. Buffetta, No. 99-1832, 2000 WL 1573085 (3d
Cir. 2000), apparently the parties neither cited Wilton nor contested
jurisdiction.

5. In Nationwide Mutual Fire Insurance Co. v. Cassel, 881 F. Supp. 133,
136 (M.D. Pa. 1994), the court declined to exer cise jurisdiction where
the
claim presented "a novel, and hence, unsettled issue of state law which
the state courts should address."

                               8
cases, some courts have adopted the practice of certifying
questions of law to the state's highest court. This practice
has been encouraged and utilized by the United States
Supreme Court. This Court has also used this pr ocedure
and found it to be a great benefit. W e recognize the
necessity of restraint, however, so that we do not
overburden the already crowded dockets of the state
appellate courts with too many certifications.

"[I]n declaratory judgment actions Congr ess has afforded
the federal courts a freedom not present in ordinary
diversity suits to consider the state interest in having the
state courts determine questions of state law." Mitcheson,
955 F.3d at 238. Consequently, it is counterproductive for
a district court to entertain jurisdiction over a declaratory
judgment action that implicates unsettled questions of state
law, questions which might otherwise be candidates for
certification to the state's highest court. Such matters
should proceed in normal fashion thr ough the state court
system. See id. at 240 (4th Cir. 1992) ("The [state] interests
assume greater saliency where, as her e, the issues of state
law are close."); see also Meritcar e, Inc. v. St. Paul Mercury
Ins. Co., 166 F.3d 214, 225 n.7 (3d Cir . 1999). In short,
where the applicable state law is uncertain or
undetermined, district courts should be particularly
reluctant to entertain declaratory judgment actions.

II.

Clearly, the case at hand falls outside the ar ea outlined
by Brillhart and Wilton as appr opriate for the District Court
to exercise its jurisdiction. At the time the court denied E
& J's motion to dismiss, Dixon's personal injury suit and E
& J's petition for declaratory judgment were both pending
in state court before the same judge, who was presumably
already familiar with the insurance policy and with the
scientific evidence available on lead paint poisoning.
Judicial efficiency was not promoted when the District
Court also considered this evidence, as it inevitably had to
when deciding the federal declaratory judgment action.6 If
_________________________________________________________________

6. In McDowell Oil Service, Inc. v. Interstate Fire and Casualty Co., 817
F.
Supp. 538, 546 (M.D. Pa. 1993), a district judge noted that it would be
inefficient for a federal court to decide a declaratory judgment action
that
would turn on the assessment of scientific data when the state court
judge in the underlying tort action was already familiar with this data.

                               9
the District Court had not interfered, the state court would
have been able to develop a coordinated schedule of briefing
and discovery that would have promoted the efficient
resolution of both the declaratory judgment action and the
underlying tort action, thereby conserving judicial
resources as well as those of the parties.

Not only were there strong factors militating against the
exercise of jurisdiction over this declaratory judgment
action, but no federal interests were pr omoted by deciding
this case in the District Court. Not a single federal question
was presented to the District Court by State Auto. As noted
earlier, two trial court decisions, but no appellate cases,
were in existence in the state system, a forum that was
fully able and prepared to resolve this purely state law
issue. Entertainment of a federal declaratory judgment suit
in these circumstances fits Brillhart's description of a
"vexatious" and "gratuitous interfer ence" with state court
litigation.

It is irrelevant that the state declaratory judgment
petition was filed after its counterpart in the District Court.
Moreover, E & J's vigorous objection to the District Court's
assumption of jurisdiction should have weighed in favor of
refusing to entertain the action. Even in the absence of
such a challenge, however, the circumstances presented
here would readily have supported a decision to decline
jurisdiction sua sponte.

In order to maintain the proper relationship between
federal and state courts, it is important that district courts
"step back" and allow the state courts the opportunity to
resolve unsettled state law matters. As W ilton reminded us,
the Declaratory Judgment Act confers a discr etion on the
courts rather than an absolute right on litigants. Wilton,
515 U.S. at 287. It follows that the state's inter est in
resolving its own law must not be given short shrift simply
because one party or, indeed, both parties, perceive some
advantage in the federal forum. When the state law is firmly
established, there would seem to be even less r eason for the
parties to resort to the federal courts. Unusual
circumstances may occasionally justify such action, but
declaratory judgments in such cases should be rar e.

                               10
We appreciate the efforts of the able and conscientious
district judge in this case to expedite the disposition of
litigation assigned to him, but as we have mentioned, other
overriding considerations come into play. Decisions in
declaratory judgment actions must yield to "considerations
of practicality and wise judicial administration." Wilton, 515
U.S. at 288. The desire of insurance companies and their
insureds to receive declarations in federal court on matters
of purely state law has no special call on the federal forum.

Whether declaratory relief should be granted"will depend
upon a circumspect sense of its fitness infor med by the
teachings and experience concerning the functions and
extent of federal judicial power." Id . at 287. We conclude
that the assumption of jurisdiction under the Declaratory
Judgment Act in this case was not consistent with a sound
exercise of discretion.

Accordingly, we will vacate the judgment of the District
Court and remand with directions to dismiss the complaint.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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