Reifer v. Westport Ins. Corp., 751 F.3d 129 (3d Cir. 2014):

Appellant Westport Insurance Corporation ("Westport") appeals the District Court for the Middle District of Pennsylvania's decision declining to exercise jurisdiction over the instant case and its Order dismissing the case without prejudice and remanding it to the Court of Common Pleas of Lackawanna County, Pennsylvania. Reifer v. Westport Ins. Corp., 943 F. Supp. 2d 506, 512 (M.D. Pa. 2013). It also appeals the District Court's denial of its motion for reconsideration. Reifer v. Westport Ins. Corp., No. 4:12-CV-0533, 2013 U.S. Dist. LEXIS 82390, 2013 WL 2650275, at *1 (M.D. Pa. June 12, 2013). For the reasons  [*2] that follow, we will affirm the decisions of the District Court declining jurisdiction and denying reconsideration.

I. BACKGROUND

Rox-Ann Reifer's ("Reifer") Complaint avers the following: Reifer suffered a worker's compensation injury during the course of her employment at Intermediate Unit-20 (IU-20) where she provided special education to students. Her injuries prevented her from returning to work, and she retained Donald P. Russo, Esquire ("Russo") out of concern that IU-20 may bring disciplinary proceedings against her. At the time she retained Russo, he carried legal malpractice insurance with Westport and was in full compliance with the Pennsylvania Rules of Professional Conduct as they pertained to insurance coverage. When IU-20 initiated disciplinary proceedings against Reifer, Russo failed to appear at the hearing. When IU-20 terminated her in accord with the hearing master's recommendation, Russo also failed to appeal. Russo then filed a federal lawsuit alleging violation of Reifer's employment rights, which he lost for failure to exhaust her state remedies. Finally, when Reifer sought alternate employment, she asked Russo how to answer an employment application question as  [*3] to whether she had ever been terminated. Russo advised her to answer in the negative. Reifer was terminated and subjected to public discipline for falsely answering the employment application.

On March 18, 2008, Reifer commenced a malpractice claim against Russo in state court by Praecipe for Writ of Summons,¹ which was served upon him. At the time of service, Russo carried a "claims-made" policy with Westport, which only covered losses claimed by him during the policy period or within 60 days of the policy's expiration. Despite this, Russo failed to inform Westport of the action. That August, Russo's policy lapsed and he failed to secure a replacement policy. Four months later, on December 29, 2008, Reifer filed a Complaint that was served upon Russo. Russo only then notified Westport of the claim against him.

1   Pennsylvania allows a suit to be commenced by filing with the prothonotary a praecipe for a writ of summons or a complaint. Pa.R.C.P. No. 1007.

Westport refused to defend Russo. Eventually, Russo admitted liability but the issue of damages was tried in state court. The jury awarded Reifer a judgment of $4,251,516.00 plus delay damages. Russo assigned to Reifer any rights he might  [*4] have had under his legal malpractice insurance policy with Westport. On March 1, 2012, Reifer, as Russo's assignee, filed the instant action against Westport for a declaratory judgment pursuant to Pennsylvania's Declaratory Judgments Act, 42 Pa.C.S.A. § 7531, et seq. in the Court of Common Pleas of Lackawanna County, Pennsylvania.

In her declaratory judgment Complaint, Reifer argued that, under Pennsylvania case law and Pennsylvania Rule of Professional Conduct 1.4(c), Westport was required to show it was prejudiced by Russo's failure to notify it of her claim. Because Westport did not do so, Reifer argued it owed Russo a duty to defend and indemnify and requested a declaratory judgment that Westport "must pay" her judgment. (Compl. ¶¶ 36-59.)

Reifer also filed another suit by Praecipe for Writ of Summons under a different case number. The summons was served but no complaint was filed.

On March 23, 2012, Westport removed the cases to federal court; no proceedings remained in state court. Westport moved to dismiss Reifer's action on the merits. Reifer opposed the motion and Westport replied. In response, Reifer moved to amend her Complaint, which Westport opposed. Neither party argued  [*5] that the District Court should decline its discretionary jurisdiction under the Declaratory Judgment Act ("DJA"), 28 U.S.C. §§ 2201-2202. On October 12, 2012, a United States Magistrate Judge considered the case on its merits and filed a 39-page report and recommendation advising that Reifer's Motion to Amend should be denied and Westport's Motion to Dismiss should be granted. Reifer v. Westport Ins. Corp., No. 4:CV-12-0533, 2012 U.S. Dist. LEXIS 187916, 2012 WL 7998229, at *20 (M.D. Pa. Oct. 12, 2012). Reifer objected and Westport responded.

On May 1, 2012, the District Court sua sponte declined to exercise jurisdiction over the matter. Reifer, 943 F. Supp. 2d at 508. It rejected the Magistrate's report and recommendation, dismissed the case without prejudice, and remanded it to the Court of Common Pleas of Lackawanna County, Pennsylvania. Id. Westport filed a Motion for Reconsideration, which the District Court denied. Reifer, 2013 U.S. Dist. LEXIS 82390, 2013 WL 2650275, at *1. Westport appeals both decisions.

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III. DISCUSSION

Westport presents two main issues for consideration: (1) whether the DJA, the authority by which the District Court declined to exercise jurisdiction, applies; and (2) if so, whether the District Court abused its discretion in declining jurisdiction.

A. The DJA applies.

Under the DJA, 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).⁴ The Supreme Court has long held that this confers discretionary, rather than compulsory, jurisdiction upon federal courts. Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494, 62 S. Ct. 1173, 86 L. Ed. 1620 (1942). This is an exception to the general rule that "federal courts have a strict duty to exercise the jurisdiction that is conferred upon them by Congress." Quackenbush, 517 U.S. at 716 (citing Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 821, 96 S. Ct. 1236, 47 L. Ed. 2d 483 (1976)).

4   Although Reifer's declaratory judgment claim was originally brought in state court under Pennsylvania law, the question of whether to exercise federal jurisdiction to adjudicate the controversy became a procedural issue under federal law. See, e.g., Golden Eagle Ins. Co. v. Travelers Cos., 103 F.3d 750, 753 (9th Cir. 1996), overruled on other grounds by Gov't Emps. Ins. Co. v. Dizol, 133 F.3d 1220 (9th Cir. 1998) (en banc); accord Fischer & Porter Co. v. Moorco Int'l Inc., 869 F. Supp. 323, 326 (E.D. Pa. 1994).

Westport  [*11] claims that the District Court did not have discretion to decline jurisdiction because the requirements for diversity jurisdiction were satisfied and the DJA did not apply. It argues that, although Reifer's claim was couched in terms of a declaratory judgment, it was in reality a suit which sought a judgment compelling Westport to pay money damages.⁵ To Westport, the timing of the state court judgment establishing Russo's liability is crucial. Because Russo's liability had already been established, the declaratory judgment action was not prospective. Rather, Reifer's complaint simply sought a declaratory judgment that Westport "must pay" the damages already awarded to her. (See Compl. ¶¶ 82-88.) Because "[t]here is no meaningful difference between a complaint seeking a declaration that a defendant 'must pay' damages and a complaint seeking to recover such damages," Westport contends Reifer's claim is legal in nature, not declaratory. (Brief of the Appellant ("Appellant Br.") at 20-21.) Thus, Westport argues, the District Court had no discretion to decline jurisdiction.⁶

5   In a few sentences, Westport advances an alternate argument based upon Reifer's other suit, brought by Praecipe for  [*12] Writ of Summons. It argues that Reifer's other suit constituted a claim for damages and that this claim for legal relief triggered the district court's "virtually unflagging obligation" to exercise its jurisdiction. Colo. River, 424 U.S. at 817. Thus, Westport argues, even if Reifer's primary claim was a declaratory judgment action, "there was, in fact, a claim for damages before the district court." (Brief of the Appellant ("Appellant Br.") at 22.) In support of its claim, Westport directs our attention to the Civil Cover Sheet attending Reifer's praecipe. The Civil Cover Sheet indicates that money damages are requested, that Reifer's action sounds in contract, and describes the action thus: "Assignment of cause of action for payment of verdict."

We understand Westport to argue that the District Court had before it a "mixed claim" for declaratory and legal relief. We have never ruled on the legal standard a district court must apply when addressing whether it may decline jurisdiction when both declaratory and legal relief are claimed. See, e.g., Hartford Ins. Co. of S.E. v. John J., 848 F. Supp. 2d 506, 510 (M.D. Pa. 2012). Moreover, our sister circuits are "sharply divided" and advance four different standards. See, e.g., Perelman v. Perelman, 688 F. Supp. 2d 367, 374-75, n.3 (E.D. Pa. 2010) (analyzing circuit split). Our district courts have also embraced competing approaches. Compare id. at 367-77 (adopting "independent claim" test), with Hartford Ins. Co., 848 F. Supp. 2d at 512 (disagreeing with Perelman and adopting "heart of the action" test). Westport does not mention these competing approaches nor urge us which to adopt.

We need not, however, resolve this issue because we find that Westport has failed to show that Reifer's praecipe alone raises Reifer's action to the level of a "mixed claim." Reifer's praecipe was filed under a different case number than her declaratory judgment action. It says nothing of the underlying claim other than that it is a "Civil Action." Reifer did not file a complaint in this case and Westport did not compel her to do so. See Pa.R.C.P. No. 1037(a). Neither the Magistrate Judge nor the District Court ever mentioned the praecipe. Indeed, it is not even clear that Westport was able to remove it to federal court. See Sikirica v. Nationwide Ins. Co., 416 F.3d 214, 223 (3d Cir. 2005); accord Gervel v. L & J Talent, 805 F. Supp. 308, 308-09 (E.D. Pa. 1992).  [*14] Further, we are not persuaded by Westport's heavy reliance on Reifer's Civil Cover Sheet. See, e.g., Polanco v. Coneqtec Universal, 474 F. Supp. 2d 735, 736 n.1 (E.D. Pa. 2007) (citing Pa.R.C.P. Nos. 1007, 1017) (explaining that a Civil Cover Sheet is "not a writ of summons, praecipe, or complaint[,] . . . cannot be used to commence an action under Pennsylvania law[,] and is not deemed a pleading under Pennsylvania law"). Under these circumstances, Westport has failed to show that Reifer's other suit divests the District Court of its DJA discretion, especially where we understand that the purpose of the other suit (as explained at oral argument) was merely to protect a future money judgment claim from running afoul of the statute of limitations if Reifer prevailed on the declaratory judgment claim.

6   Westport warns that permitting plaintiffs to so stylize their complaints would "make a mockery of diversity jurisdiction" by permitting local plaintiffs to deprive out-of-state defendants of the right to a federal forum they otherwise would have when legal relief was sought. (Appellant Br. at 21.) It argues that plaintiffs could plead "any ordinary claim for damages in terms of seeking declaratory  [*15] relief." (Id.) Thus, courts must focus on the claim's substance, rather than its form, when deciding if the DJA applies.

The District Court rejected this argument, finding that the instant case was

   precisely a declaratory judgment action. Reifer wants the [District Court] to declare that Donald P. Russo, Esquire was covered by the malpractice insurance policy issued by Westport at the time he committed legal malpractice. Westport wants the undersigned to declare that Russo was not covered by the policy issued at that time. The award of damages has, of course, already been rendered by the Court of Common Pleas of Northampton County. The [District Court] is not being asked to award damages against Westport; [it] is instead merely being asked to determine if Russo was or was not covered under his legal malpractice insurance policy at the time he committed legal malpractice.

Reifer, 2013 U.S. Dist. LEXIS 82390, 2013 WL 2650275, at *2.⁷

7   The District Court's characterization of Reifer's declaratory judgment is not entirely correct. There is no dispute that the policy was in effect and that Russo was covered at the time he committed legal malpractice. Under the claims-made policy that governed the relationship, the dispositive  [*16] question before the District Court was not whether Russo was covered at the time he committed malpractice, but whether he reported the claim to Westport within the appropriate time period. Accordingly, what is disputed is whether Russo was covered by Westport's policy at the time he reported Reifer's claim.

We agree that the DJA applies because in reality Reifer sought only a declaratory judgment. While Reifer's Complaint admittedly uses the words "must pay," in substance it requests a declaration that Russo was covered by the policy. Specifically, Reifer sought a declaration that, because Westport never showed that it was prejudiced by Russo's late notice, Russo was covered by Westport's policy at the time he reported Reifer's claim. As the District Court noted, it was not being asked to award damages; both parties well knew that damages had already been awarded in state court. Id. Westport's own filings indicate that the primary question was one of coverage, (Appendix ("App.") at 97 ("This is an insurance action in which Rox-Ann Reifer seeks coverage for a legal malpractice claim . . . . Ms. Reifer's claim is not covered . . . .")), a common issue in declaratory judgments. See Allstate Ins. Co. v. Seelye, 198 F. Supp. 2d 629, 631 (W.D. Pa. 2002)  [*17] (noting the "all too common case" of insurance companies using diversity jurisdiction to seek declarations on purely state law matters). Additionally, Reifer's status as Russo's assignee undercuts Westport's argument. In Westport's own words, "it cannot be disputed that Ms. Reifer 'stands in Mr. Russo's shoes' for purposes of pursuing coverage under the policy." (App. at 188 (emphasis added).)

Moreover, simply because additional recovery would likely flow to Reifer as a result of a declaration in her favor does not preclude applicability of the DJA. Courts "may" grant declaratory judgments "whether or not further relief is or could be sought." 28 U.S.C. § 2201(a); see also id. § 2202 ("Further necessary or proper relief based on a declaratory judgment or decree may be granted, after reasonable notice and hearing, against any adverse party whose rights have been determined by such judgment."); United States v. Pa., Dep't of Envtl. Res., 923 F.2d 1071, 1075 (3d Cir. 1991) (citing Fed. R. Civ. P. 57) (noting that a district court may exercise jurisdiction over declaratory judgment action where "another adequate remedy exists"); Alexander & Alexander, Inc. v. Van Impe, 787 F.2d 163, 166 (3d Cir. 1986)  [*18] (finding that prevailing party in a declaratory judgment may seek "further relief," including damages). Westport cites no authority for the broad conclusion that a district court may never exercise its discretionary jurisdiction under the DJA simply because another action resulted in monetary damages, the disposition of which will be affected by the court's declaration.⁸ It may, in some circumstances, be possible for a party's claim for legal relief to masquerade as a declaratory judgment, improperly activating discretionary jurisdiction. However, we do not believe that this is the case with the matter at hand.

8   We note that a potential unintended consequence of such a rule could be to permit an insurer, but not an insured, to bring a declaratory judgment action in precisely the same circumstances. Wilton is illustrative, although it did not address the instant issue. There, an insurer refused to defend or indemnify its insured. Wilton, 515 U.S. at 279. A jury awarded over $100 million against the insured. Id. at 280. After the verdict, the insurer sought a declaration that its policy did not cover the insured's liability in that case. Id. Were the insurer to lose the declaratory judgment  [*19] action, monetary relief would presumably flow to the insured. But no one could, of course, claim that the insurer's declaratory judgment action was really a claim for damages. Thus, under Westport's rule, the DJA would apply and the district court could exercise discretion. However, if the insured were to bring the declaratory action and win, monetary relief would also presumably flow to the insured. Westport's approach would require interpreting this as a claim for damages and preclude application of the DJA. Despite being identical to the previous scenario (despite which party brings the claim), the district court would be unable to exercise its DJA discretion. Such an approach would be unfair.

B. The District Court did not abuse its discretion.

The instant case raises the question of the "outer boundar[y]" of a district court's discretion under the DJA, specifically whether a district court may decline jurisdiction over a declaratory judgment action when "there are no parallel state proceedings." Wilton v. Seven Falls Co., 515 U.S. 277, 290, 115 S. Ct. 2137, 132 L. Ed. 2d 214 (1995).⁹ It also presents an opportunity to help clarify this area of the law as many of our sister circuits have done. We ultimately conclude  [*20] that declining to exercise jurisdiction over the instant case was not an abuse of discretion by the District Court because Reifer raises issues of state law peculiarly within the purview of the Pennsylvania court system which are better decided by that system.