Declaratory judgment insurance action must play out in state court, federal judge decides

A U.S. District Judge in eastern Pennsylvania has dismissed a declaratory judgment

action that had been filed by an insurance company against a bar and restaurant that holds a policy with the plaintiff, ruling that the federal venue shouldn’t exercise jurisdiction over the case because there is a similar action pending in state court.

Judge Michael Baylson agreed with defendants Legends Inc. and Jobin J. Granstrom, who filed a motion to dismiss the suit brought by First Mercury Insurance Company because the same issues are being litigated in a Pennsylvania state court action, and that according to a Third Circuit Court of Appeals ruling, the state forum should decide the case.

The case is grounded in an insurance policy that was issued by Mercury to Legends, a Berks County, Pa. establishment that was the site of an incident involving co-defendant Granstrom, who allegedly injured a patron named Jordan Seyler when Granstrom “gruffly ejected” Seyler from the business.

Seyler brought an injury claim against Legends, Granstrom and others in the Berks County Court of Common Pleas in 2011, claiming that Granstrom was acting in his capacity as a Legends employee at the time he allegedly attacked Seyler.

Legends subsequently requested that Mercury pay the bar’s and Granstrom’s defense costs and indemnify them for any liabilities arising out of the underlying action.

In the summer of 2011, Mercury rejected the bar’s request, asserting that the nature of Seyler’s claims triggered certain coverage exceptions in the insurance policy relieving Mercury of any defense and indemnification obligations.

Then, this past spring, Mercury filed a federal action in the Eastern District of Pennsylvania claiming the same.

The defendants filed their motion to dismiss on July 11, the record shows.

During oral argument this past September, court papers state, plaintiffs’ counsel suggested that the injury claim was still pending in Berks County, although evidence showed that the underlying action had been dismissed without prejudice on Jan. 13.

The federal court on Oct. 4 ordered counsel to verify the status of the underlying action, after which it was determined that the injury claim had been dismissed without prejudice.

Filings, however, also revealed that after Mercury had filed its action in the federal court, the defendants had filed a separate suit in Berks County Court for a declaratory judgment seeking coverage from Mercury.

In his Dec. 19 memorandum and order, U.S. District Judge Michael Baylson, of the Eastern District of Pennsylvania, wrote that the federal court has declined to exercise its discretionary jurisdiction over the plaintiff’s declaratory judgment action, primarily because there would be “no federal interests promoted by deciding this case.

“The case must be dismissed in recognition of the ‘considerations of practicality and wise judicial administration’ that the Supreme Court and Third Circuit have instructed are the touchstone for the proper exercise of jurisdiction in declaratory judgment cases,” Baylson wrote.

Baylson wrote that the central question he was faced with in this case was whether the controversy would be better settled in state court, to which he ultimately determined it would.

Baylson looked to the Third Circuit ruling in State Auto Ins. Cos. v. Summy, which determined such cases are better decided in state court.

In this case, the insurance policy issued by Mercury contained a choice of law clause selecting Illinois law, as well as a non-exclusive forum selection clause that gives Mercury the option to litigate in the state of Illinois.

In his ruling, Baylson wrote that state courts are just as able as federal district courts to apply out-of-state law, and therefore the application of out-of-state law by itself does not trigger federal oversight.

“Applying the three factors from Summy, which district courts should consider when determining whether the parties’ dispute would be better handled by a state court, the dismissal of the Underlying Action is a significant reason to decline jurisdiction, as is the existence of a parallel declaratory judgment action in state court,” Baylson wrote.