Presumption of Need for State Declaratory Relief Action Requires Federal Court to Refuse Jurisdiction

Like every lawyer who ever practiced law I would prefer the judge to be my favorite uncle and godfather, the jury to be made up of my wife, my mother, my brother, my sister and close friends. That is why some lawyers work hard to get litigation in a favorable jurisdiction with a judge whose proclivities and prejudices are known. The attempts work often. In that regard many lawyers and insurers believe federal courts are more favorable to insurers than policyholders.

In Penn Mutual Life Insurance Company v. Wells Fargo Bank, N.A., as Securities Intermediary, Civil Action No. 18-40, United States District Court For The Eastern District Of Pennsylvania (October 1, 2018) Penn Mutual Life Insurance Company sued in federal District Court seeking a determination that the life insurance policy it issued on the life of a Florida resident was void ab initio. Wells Fargo moved to dismiss the complaint, arguing that the Court should decline jurisdiction pursuant to the Declaratory Judgment Act (“DJA”) in favor of an action pending in Florida state court.

BACKGROUND

Penn Mutual sought a declaration regarding the validity of the $3 million life insurance policy (“the Policy”) it issued on the life of Sylvia Criden-Roebuck, a Florida resident. When the policy was issued in 2007, the original owner was the Sylvia Criden-Roebuck 2007 Insurance Trust. Shortly after the policy was issued and in force, Ms. Criden-Roebuck and the Family Trust that she formed sold the beneficial interest in the Insurance Trust that owned the Life Insurance Policy to the GIII Accumulation Trust. In 2015, GIII placed the Policy into a securities intermediary account with Wells Fargo. The Policy is presently owned by Wells Fargo as securities intermediary.

After Ms. Criden-Roebuck’s death on October 20, 2017, Wells Fargo and the insured’s son, Arthur Criden, both submitted a claim for the benefit payable under the Policy. During the claim review process, Penn Mutual “determined that the policy may have been an illegal wagering contract” procured by and paid for by investors through the GIII Accumulation Trust. Instead of formally denying the claim, Penn Mutual sued and requested a declaratory judgment that the Policy is void ab initio as “an illegal wagering contract” under Delaware law.

Wells Fargo filed an action in Florida state court against Penn Mutual, Arthur Criden as the personal representative of the Criden-Roebuck estate, and Penn Mutual’s Florida-based agent, Larry Schweiger. Wells Fargo asserts a claim for breach of contract against Penn Mutual for its failure to pay the death benefits as required under the policy. If Penn Mutual successfully avoids coverage under the Policy based on the allegation that Ms. Criden-Roebuck did not pay the initial premiums with her own funds, Wells Fargo seeks damages from Schweiger for fraud, negligent misrepresentation, and negligent procurement based on his actions in connection with the Policy.

DISCUSSION

Wells Fargo argued that the Court should decline to exercise jurisdiction pursuant to the DJA, which “authorizes district courts to ‘declare the rights and other legal relations of any interested party seeking such declaration’” but “does not itself create an independent basis for federal jurisdiction.” Instead, actions seeking only declaratory relief are discretionary and courts may therefore decline jurisdiction over such suits.

After determining whether there is a parallel state court proceeding, courts consider the following factors, to the extent they are relevant:

(1)               the likelihood that a federal court declaration will resolve the uncertainty of obligation which gave rise to the controversy;
(2)               the convenience of the parties;
(3)               the public interest in settlement of the uncertainty of obligation;
(4)               the availability and relative convenience of other remedies;
(5)               a general policy of restraint when the same issues are pending in a state court;
(6)               avoidance of duplicative litigation;
(7)               prevention of the use of the declaratory action as a method of procedural fencing or as a means to provide another forum in a race for res judicata; and
(8)               (in the insurance context), 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.

The Existence of a State Parallel Proceeding

Penn Mutual purposefully availed itself of the Florida forum in such a way that it could reasonably foresee being haled into a Florida court; its contacts with the state can in no way be considered “random,” “fortuitous,” or “attenuated.” It was reasonably foreseeable that Penn Mutual’s refusal to pay benefits under the life insurance policy it issued in Florida, on the life of a Florida resident, was likely to lead to litigation in a Florida court. The solicitation of life insurance products to Florida residents through an insurance agent in Florida further reinforces Penn Mutual’s deliberate affiliation with the forum State and the reasonable foreseeability of possible litigation there.

Fair Play and Substantial Justice

The Florida court has personal jurisdiction over Penn Mutual for Wells Fargo’s claims, and all matters in controversy between the parties in this case can be fully adjudicated in the state action. Therefore, the state breach of contract action is a parallel proceeding to this federal case.

That Penn Mutual filed this declaratory judgment action before Wells Fargo could file suit in state court is not indicative of procedural fencing, because it is irrelevant whether the state declaratory judgment action was filed after its counterpart in federal court.

Considered together, all factors weigh against exercising jurisdiction over this case, and do not outweigh the strong presumption against exercising jurisdiction in light of the pending state action. Consequently, the Court declined to exercise jurisdiction.

ZALMA OPINION

Forum shopping is a tried and true exercise of legal analysis. In this case it failed because, unlike the District Court in Pennsylvania, everything to do with the issuance of the policy, the contracts surrounding the policy and the claim were set in Florida. The District Court, even though the suit in Pennsylvania was filed first, exercised its discretion and refused to take jurisdiction when Florida was a better forum.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

THE HOMEOWNERS INSURANCE POLICY

HOW TO BUY AN APPROPRIATE HOMEOWNERS POLICY AND SUCCESSFULLY MAKE A CLAIM TO THE INSURER

Read about this and other insurance books by Barry Zalma at http://zalma.com/blog/insurance-claims-library/

Insurance is a contract between a person seeking insurance and an insurer. It is obtained by making contact with the insurer as a prospective insured seeking insurance. The homeowners policy is a specialized policy of insurance that protects the homeowner from certain risks of loss to the real and personal property at the home, the exposure the insured faces for injury to a household employee, and the exposure the insured faces to liability for bodily injury or property damage caused to third parties. The book explains how to buy a homeowners policy and how to collect on any claim made to the homeowners insurer.

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