Scottsdale Ins Co v. Roumph

• Court: Court of Appeals for the Sixth Circuit
• Decided: May 4, 2000
• Docket: 98-1950
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 ELECTRONIC CITATION: 2000 FED App. 0158P (6th Cir.) File Name: 00a0158p.06

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT _________________

;  SCOTTSDALE INSURANCE  COMPANY,  Plaintiff-Appellant,  No. 98-1950

 v. >    BEVERLY ROUMPH,

 Individually and as Next  Friend of Lavina Roumph;  LAVINA ROUMPH, Defendants-Appellees.  1 Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 97-73396—Gerald E. Rosen, District Judge. Argued: March 8, 2000 Decided and Filed: May 4, 2000 Before: WELLFORD, SILER, and GILMAN, Circuit Judges.

1 2 Scottsdale Ins. Co. v. Roumph, et al. No. 98-1950

_________________ COUNSEL ARGUED: Ronald S. Lederman, SULLIVAN, WARD, BONE, TYLER & ASHER, P.C., Southfield, Michigan, for Appellant. Mark R. Bendure, BENDURE & THOMAS, Detroit, Michigan, for Appellees. ON BRIEF: Ronald S. Lederman, Thomas L. Auth, Jr., SULLIVAN, WARD, BONE, TYLER & ASHER, P.C., Southfield, Michigan, for Appellant. Mark R. Bendure, BENDURE & THOMAS, Detroit, Michigan, for Appellees. _________________ OPINION _________________ HARRY W. WELLFORD, Circuit Judge. In 1995 defendant herein, Beverly Roumph, as next friend for Lavina Roumph, filed a state tort action in the Wayne County Circuit Court in Michigan, based upon a sexual assault upon her young daughter. Ms. Roumph alleged that she had accepted minor Keith Kelley, Jr., into her home as a foster child upon placement by The Children’s Center, a Michigan social welfare agency. Within a month, Kelley raped four-year-old Lavina Roumph, defendant’s daughter. Roumph’s second amended complaint in the state action alleged negligence and/or gross negligence by The Children’s Center in failing to disclose pertinent information regarding possible danger to her and the foster family; failing to warn the foster family that Kelley had been sexually abused and had a history of1 molesting other children; failing properly to review his file; and failing to properly recommend and provide psychiatric or psychological treatment for Kelley. Scottsdale Insurance Company (“Scottsdale”), plaintiff in this proceeding, insured

1 We recite the names of the minors with considerable reluctance, but they have been made public in prior state proceedings and in the district court by defendant Roumph. No. 98-1950 Scottsdale Ins. Co. v. Roumph, et al. 3

The Children’s Center and provided its defense under a reservation of rights in the state proceeding. The Scottsdale policy with The Children’s Center provided general liability coverage of $3,000,000 but contained a “Sexual Misconduct Limitation Endorsement” which limited coverage to $100,000: “Sexual misconduct” means any action or behavior, or any physical contact or touching, which is intended to lead to, or which culminates in any sexual act, arising out of the professional treatment and care of any client, patient, or any other person whose care has been entrusted to the named insured, whether committed by, caused by or contributed to by failure of any insured to: 1. Properly train, hire or supervise any employee, or; 2. Properly control, monitor or supervise the treatment and care of any client, patient, or any other person whose care has been entrusted to the named insured. In the state court proceedings the issue arose as to whether Scottsdale’s applicable policy limits in the case were $3,000,000 or only $100,000 under the special endorsement. Scottsdale filed this declaratory action under 28 U.S.C. § 2201 in the United States District Court for the Eastern District of Michigan on July 14, 1997, seeking a ruling on applicable limits in the state court action. At the beginning of the state trial, The Children’s Center, with Scottsdale’s consent, admitted liability, and the parties on February 2, 1998, made the following agreement: One, Children’s Center will admit liability. Two, case will proceed against Children’s Center as to damages only. Three, the individual defendants, Wheeler, Skowronski, and Potje will be dismissed with prejudice without a release. .... 4 Scottsdale Ins. Co. v. Roumph, et al. No. 98-1950 No. 98-1950 Scottsdale Ins. Co. v. Roumph, et al. 9

Four, plaintiffs will not seek to enforce any judgment breadth of leeway we have always understood it to against Children’s Center over and above the insurance suggest, distinguish the declaratory judgment context policy limits. from other areas of the law in which concepts of discretion surface. . . . When all is said and done, we Five, defendants Wheeler, Skowronski and Potje were have concluded, “the propriety of a declaratory relief in employees of the Children’s Center during their a particular case will depend upon a circumspect sense of respective periods of employment and acted within the its fitness informed by the teachings and experience scope of employment as to the matters in this action. concerning the functions and extent of federal judicial power.” Wycoff, supra, [344 U.S.] at 243. .... .... That nothing contained in this agreement eviscerate any coverage under the existing insurance policy, We agree, for all practical purposes, with Professor including any taxable costs or interest. Borchard, who observed half a century ago that “[t]here is . . . nothing automatic or obligatory about the .... assumption of ‘jurisdiction’ by a federal court” to hear a declaratory judgment action. Borchard, Declaratory This agreement is predicated upon the representation Judgments, at 313. By the Declaratory Judgment Act, that Children’s Center has a liability policy with $3 Congress sought to place a remedial arrow in the district million general limit and a $100,000 sexual misconduct court’s quiver; it created an opportunity, rather than a limit that is covering this occurrence and that the only duty, to grant a new form of relief to qualifying litigants. claim regarding the extended coverage is that claim Consistent with the nonobligatory nature of the remedy, currently stated in the pending declaratory judgment a district court is authorized, in the sound exercise of its action. discretion, to stay or to dismiss an action seeking a declaratory judgment before trial or after all arguments (Emphasis added.) Co-defendant Lula Belle Stewart Center, have drawn to a close. Inc., alleged agent of The Children’s Center, was dismissed from the suit with prejudice and without costs per a March 20, Wilton, 515 U.S. at 286-88 (citations and footnote omitted). 1998 order after settling with Roumph for $1,000,000, the We believe that the district court properly considered the amount of its separate insurance liability coverage. Due to circumstances involved in whether to exercise its discretion the stipulation entered in the state court, Scottsdale asserts to issue a declaratory judgment in a dispute pending in state that it was not necessary to offer evidence regarding the court. It exercised its discretion not to entertain the case. In nature and extent of negligence of the insured as “defined by reaching that result, we cannot say that the district court did the admitted factual and legal allegations in the First not employ “the sound exercise of its discretion” under the Amended Complaint filed in the state court action.” circumstances. Wilton, 515 U.S. at 288. The state court jury returned an $8,000,000 verdict for Accordingly, we AFFIRM the decision of the district court. Roumph on February 12, 1998, and a judgment was entered on June 12, 1998, whereby Roumph reportedly recovered the net amount of $6,233,857.32. After entry of judgment but while a motion for new trial and a motion for remittitur were 8 Scottsdale Ins. Co. v. Roumph, et al. No. 98-1950 No. 98-1950 Scottsdale Ins. Co. v. Roumph, et al. 5

This case is a close one considering the factors we have pending, Roumph, on February 17, 1998, filed a motion for a relied upon in cases of this kind. We see no indication of an stay or dismissal in the district court. Scottsdale filed a attempt to delay by the insurance carrier through the response and, following a hearing, the district court granted declaratory action in federal court; and a prompt declaration Roumph’s motion and dismissed the action without prejudice of policy coverage would surely “serve a useful purpose in in August of 1998. The district court also dismissed, without clarifying the legal relations at issue.” It is hard to perceive prejudice, the parties’ cross-motions for summary judgment. of “an alternative remedy that is better or more effective.” Scottsdale timely filed a notice of appeal. The district court, however, pointed to a factor that supports It is important to note that Scottsdale also appealed the state its decision not to proceed--that “there are no reported court judgment on behalf of its insured, The Children’s decisions in Michigan or elsewhere construing the language Center,2 and that appeal is presently pending before the of [the] ‘sexual misconduct’ endorsement.” The district court Michigan Court of Appeals. Roumph has filed a declaratory concluded from this factor that it would be inappropriate “to judgment action in the Michigan state court seeking a ruling preempt the right of the state court to rule on a previously on the coverage issue, but the record does not reflect when undetermined question of state law.” Omaha Property & that action was filed, and the state court has not yet taken Casualty, 923 F.2d at 448; see also American Home action on the case. Assurance Co. v. Evans, 791 F.2d 61, 63 (6th Cir. 1986). What is involved in this case is an interpretation of a special We are presented with the issue, not a new one from contract of insurance. Indeed, had the district court Michigan, of whether the district court abused its discretion undertaken the task of legal interpretation, we might be in a in declining to entertain plaintiff Scottsdale’s declaratory position to decide whether the policy limits should be judgment action, which sought a ruling on the applicable $100,000, rather than $3,000,000. Such a result might, of policy limits for its pending state court tort action. course, “increase the friction between our federal and state courts.” This is not to say that a district court should always This court reviews the district court’s exercise of discretion turn away a declaratory judgment action when an under the Declaratory Judgment Act, 28 U.S.C. § 2201(a), for undetermined question of state law is presented, but it is an abuse of discretion. See Wilton v. Seven Falls Co., 515 U.S. appropriate consideration for the court to weigh in the 277, 289-90 (1995) (replacing de novo standard applied in, exercise of its discretion. e.g., Allstate Ins. Co. v. Mercier, 913 F.2d 273, 277 (6th Cir. 1990)). Plaintiff relies upon Allstate Ins. Co. v. Green, 825 We turn to the latest Supreme Court discussion of this issue F.2d 1061 (6th Cir. 1987), wherein this Court held that no per in Wilton: se rule applied to prevent district courts from exercising jurisdiction over declaratory actions in circumstances Since its inception, the Declaratory Judgment Act has somewhat akin to this one. Under de novo review, this Court been understood to confer on federal courts unique and reversed the district court’s dismissal of the declaratory action substantial discretion in deciding whether to declare the because the district judge “failed to exercise any discretion, rights of litigants. On its face, the statute provides that a but felt himself bound to dismiss based on our decisions in court “may declare the rights and other legal relations of any interested party seeking such declaration,” 28 U.S.C. § 2201(a) (1988 ed., Supp. V) (emphasis added). The 2 Paula Skowronski, Eveldora Wheeler, Steve Potje, and The statute’s textual commitment to discretion, and the Children’s Center were named defendants in Roumph’s motion for abstention. However, the notice of appeal includes only the parties listed. 6 Scottsdale Ins. Co. v. Roumph, et al. No. 98-1950 No. 98-1950 Scottsdale Ins. Co. v. Roumph, et al. 7

American Home and Manley, Bennett,” and the Court Omaha Property &Casualty Ins. Co. v. Johnson, 923 F.2d remanded “to permit that court to assess the propriety of the 446, 447-48 (6th Cir. 1991); Mercier, 913 at 277; Grand action pursuant to the general considerations, as well as the Trunk W. R.R. v. Consolidated Rail Corp., 746 F.2d 323, 326 five-factor test.” Green, 825 F.2d at 1065, 1067 (citing (6th Cir. 1984). Manley, Bennett, McDonald & Co. v. St. Paul Fire & Marine Ins. Co., 791 F.2d 460, 462 (6th Cir. 1986) (de novo review)); The district court also considered concerns about federalism see Mercier, 913 F.2d at 277 (“When the record contains no expressed in Wilton v. Seven Falls Co., 515 U.S. 277 (1995), indication that the district court considered these criteria and and added additional factors to consider including: factors, this court has the option either to apply them on appeal or to remand to the district court for this exercise.”). 1. whether the underlying factual issues are important to an informed resolution of the case; Several of the cases mentioned from Michigan involved insurance carriers seeking a declaratory judgment in federal 2. whether the state trial court is in a better position to court about defense and coverage when their insureds have evaluate those factual issues than is the federal been sued for alleged tort liability in state court concerning court; and situations perceived as a “race to the courthouse,” state or federal, for a declaratory judgment determination. In many of 3. whether there is a close nexus between the these cases we decided that not proceeding in the federal case underlying factual and legal issues and state law was the wise and rational course of action. As pointed out by and/or public policy, or whether federal common or the district court, we have generally considered five factors to statutory law dictates a resolution of the declaratory assess the propriety of the federal court’s exercise of judgment action. discretion in such a situation: The district court emphasized the importance of a “well- (1) whether the judgment would settle the controversy; developed factual record” in the state court. We believe, however, that this emphasis was misplaced in this case (2) whether the declaratory judgment action would serve because liability was stipulated in state court, indicating a a useful purpose in clarifying the legal relations at concession about the nature of the minor Kelley’s known issue; background and proclivity so far as the placement center was involved, as well as the character of his sexual offense in the (3) whether the declaratory remedy is being used merely foster home. Had the district court exercised its discretion by for the purpose of “procedural fencing” or “to electing to proceed, we doubt that this would have constituted provide an arena for a race for res judicata”; “‘gratuitous interference with the orderly and comprehensive disposition of a state court litigation’” as in Grand Trunk, 746 (4) whether the use of a declaratory action would F.2d at 326 (quoting Brillhart v. Excess Ins. Co., 316 U.S. increase the friction between our federal and state 491, 495 (1942)). The defendant Roumph’s delay in seeking courts and improperly encroach on state jurisdiction; declaratory judgment in state court, moreover, removed any and consideration of a race to the courthouse steps for a res judicata decision in this controversy. A declaratory decision (5) whether there is an alternative remedy that is better should “settle the controversy” about the extent of insurance or more effective. coverage, whether undertaken in state or federal court.