Aetna Casualty v. IND-COM Electric Co ( 1998 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
AETNA CASUALTY & SURETY
COMPANY,
Plaintiff-Appellant,
No. 97-1347
v.
IND-COM ELECTRIC COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Western District of North Carolina, at Charlotte.
Robert D. Potter, District Judge.
(CA-96-241-3-P)
Argued: October 27, 1997
Decided: March 23, 1998
Before RUSSELL,* MICHAEL, and MOTZ, Circuit Judges.
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Affirmed by published per curiam opinion.
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COUNSEL
ARGUED: Michael Andrew Pollard, BAKER & MCKENZIE, Chi-
cago, Illinois, for Appellant. Robert Harper Heckman, ADAMS,
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*This opinion was prepared by Circuit Judge Donald S. Russell, who
died before it was filed. The remaining members of the panel continue
to concur in what Judge Russell wrote. The opinion is accordingly filed
by a quorum of the panel pursuant to 28 U.S.C. § 46(d).
KLEEMEIER, HAGAN, HANNAH & FOUTS, Greensboro, North
Carolina, for Appellee. ON BRIEF: Charles B. Lewis, Jeffrey L.
Hamera, BAKER & MCKENZIE, Chicago, Illinois; William E. Free-
man, Kevin M. Capalbo, MOORE & VAN ALLEN, Durham, North
Carolina, for Appellant. Thomas S. Thornton, ADAMS, KLEEM-
EIER, HAGAN, HANNAH & FOUTS, Greensboro, North Carolina,
for Appellee.
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OPINION
PER CURIAM:
This appeal requires us to consider a question that the Supreme
Court expressly declined to answer in Wilton v. Seven Falls Co.,1
namely, what are the bounds of a district court's discretion to dismiss
a declaratory judgment action in the absence of a parallel state court
proceeding. Because we refuse to fashion a per se rule requiring a dis-
trict court to entertain a declaratory judgment action when no state
court proceeding is pending, and because we are further satisfied that
the demands and policies of our case law support the district court's
determination, we hold that the district court did not abuse its discre-
tion in dismissing this action.
I.
This case arises from the construction of the James H. Barnhardt
Student Activity Center at the University of North Carolina at Char-
lotte (the "Project"). Because the Project was state-owned, Chapter
143 of the North Carolina General Statutes ("N.C.G.S.") required that
the State of North Carolina (the "State") enter into four different con-
struction contracts. On November 13, 1993, the State awarded Lott
Constructors, Inc. ("Lott") the contract for general construction work,
Ind-Com Electric Company ("Ind-Com") the contract for electrical
work, Mechanical Industries, Inc. ("Mechanical") the contract for
mechanical work, and Alpha Mechanical, Inc. ("Alpha") the contract
for plumbing work. The parties referred to these contractors as "co-
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1 515 U.S. 277 (1995).
2
primes," as they all were properly regarded as prime contractors for
their specific work.
Pursuant to North Carolina law, the State, as the"Contracting
Body" for the Project, required each co-prime to submit payment and
performance bonds for its contract along with its bid. Aetna Casualty
& Surety Company ("Aetna")2 was the surety for the payment and
performance bonds furnished by Lott.
Lott encountered financial difficulties which caused considerable
delay and costs to the various co-primes. Lott's difficulties eventually
became so severe that it was unable to perform its contractual obliga-
tions. As a result, Lott notified Aetna of its failure to perform, and
pursuant to Aetna's obligations under the performance bond, Aetna
entered into a contract with Roger Builders, Inc. to complete Lott's
portion of the contract.
On March 5, 1996, Ind-Com submitted a formal request for an
equitable adjustment in the amount of $867,888 to Aetna, Lott, the
State, and the project architect, Odell Associates, Inc. ("Odell"). The
request, based upon alleged damages caused by Lott's inability to per-
form, sought payment from Aetna's performance and payment bonds.
On June 6, 1996, Aetna denied Ind-Com's claim. Less than two
weeks later, Aetna instituted this declaratory judgment action in the
United States District Court for the Western District of North Carolina,3
seeking a declaration of the rights and liabilities of Aetna and Ind-
Com under the payment and performance bonds.4 The district court
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2 Traveler's Property Casualty Corp. has since purchased Aetna.
3 The district court had diversity jurisdiction under 28 U.S.C. § 1332 to
entertain Aetna's declaratory judgment action.
4 On or about the same date, Aetna filed identical declaratory judgment
suits in the same court against the two other co-primes, Alpha and
Mechanical. In each action, Aetna sought a declaration that none of the
co-primes had a claim against the performance and payment bonds.
Aetna subsequently dismissed its suit against Mechanical pursuant to
an agreement whereby Mechanical would be bound by the outcome of
Aetna's actions against Ind-Com and Alpha. Aetna's action against Ind-
Com is the one we address in this appeal. Alpha answered and counter-
claimed against Aetna. Alpha also filed suit against Lott in state court,
a case in which Aetna later intervened.
3
declined to exercise jurisdiction over the matter and dismissed the
case. Aetna appeals, claiming that the district court erred in dismiss-
ing the case because there was no pending parallel state court pro-
ceeding.
II.
Aetna filed this action pursuant to the Declaratory Judgment Act
(the "Act"),5 which states in relevant part that:
In a case of actual controversy within its jurisdiction, . . .
any court of the United States, upon the filing of an appro-
priate pleading, may declare the rights and other legal rela-
tions of any interested party seeking such declaration,
whether or not further relief is or could be sought. Any such
declaration shall have the force and effect of a final judg-
ment or decree and shall be reviewable as such. 6
The Act does not impose a mandatory obligation upon the federal
courts to make such declarations of rights.7 Rather, a district court's
decision to entertain a claim for declaratory relief is discretionary and,
as such, reviewed for abuse of discretion.8
This circuit has long recognized the discretion afforded to district
courts in determining whether to render declaratory relief. As early as
Aetna Casualty & Surety Co. v. Quarles, 9 we stated that the decision
to grant or deny a petition for declaratory relief"is a matter resting
in the sound discretion of the trial court." 10
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5 28 U.S.C. § 2201 (1994).
6 Id.
7 See Nautilus Ins. Co. v. Winchester Homes, 15 F.3d 371, 375 (4th Cir.
1994).
8 See Wilton v. Seven Falls Co. , 515 U.S. 277, 290 (1995).
9 92 F.2d 321 (4th Cir. 1937).
10 Aetna Casualty & Surety Co. v. Quarles, 92 F.2d 321, 325 (4th Cir.
1937).
4
While we have held that district courts have great latitude in deter-
mining whether to assert jurisdiction over declaratory judgment
actions, we have nonetheless enumerated several factors to guide dis-
trict courts in their exercise of this discretion. However, unlike the
present case, these factors have been formulated in cases where there
were parallel state court proceedings. Thus, we must address a ques-
tion of first impression in this circuit, and one which the Supreme
Court declined to resolve. In short, we must "delineate the outer
boundaries of [the district court's] discretion in . . . cases in which
there are no parallel state proceedings."11
III.
The factors which we have articulated to guide a district court in
determining whether to exercise jurisdiction over a declaratory judg-
ment action have their origin in Quarles. In that case, we noted that
such an action should not be used "to try a controversy by piecemeal,
or to try particular issues without settling the entire controversy, or to
interfere with an action which has already been instituted."12 Based on
this reasoning, we thus held that a district court should normally
entertain a declaratory judgment action when it finds that the declara-
tory relief sought: (1) "will serve a useful purpose in clarifying and
settling the legal relations in issue," and (2)"will terminate and afford
relief from the uncertainty, insecurity, and controversy giving rise to
the proceeding."13
In Mitcheson v. Harris,14 we built upon the general principles set
forth in Quarles. In Mitcheson, we addressed a situation in which an
insurer came to federal court seeking a declaratory judgment on cov-
erage issues while the underlying litigation against its insured was
pending in state court. In that case, we indicated that the district
court's discretion must be guided not only by the criteria outlined in
Quarles, but by such considerations as federalism, efficiency, and
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11 Wilton, 515 U.S. at 290.
12 Quarles, 92 F.2d at 325.
13 Id. (quoting Edwin M. Borchard, Declaratory Judgments 107-09
(1934)).
14 955 F.2d 235 (4th Cir. 1992).
5
comity.15 We suggested that those additional concerns might require
the court to consider:
(i) the strength of the state's interest in having the issues
raised in the federal declaratory judgment action decided in
the state courts; (ii) whether the issues raised in the federal
action can more efficiently be resolved in the court in which
the state action is pending; and (iii) whether permitting the
federal action to go forward would result in unnecessary
"entanglement" between the federal and state court systems,
because of the presence of "overlapping issues of fact
or law."16
Finally, in Nautilus Insurance Co. v. Winchester Homes, Inc.,17 we
added another related factor which "should figure into the discretion-
ary balance."18 District courts should consider "whether the declara-
tory judgment action is being used merely as a device for `procedural
fencing' -- that is, `to provide another forum in a race for res judi-
cata' or `to achiev[e] a federal hearing in a case otherwise not
removable.'"19
IV.
Aetna contends that the absence of a pending parallel state court
proceeding is "crucial, if not dispositive, to a District Court's decision
of whether to exercise jurisdiction."20 It argues that when, as here,
there is no parallel state court action, the considerations of federalism,
efficiency, and comity are less significant, and that instead, the
court's decision should be guided by the two original factors outlined
in Quarles -- whether the declaratory relief sought: (1) "will serve a
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15 See Mitcheson v. Harris, 955 F.2d 235, 237-40 (4th Cir. 1992).
16 Id. (as cited in Nautilus, 15 F.3d at 377).
17 15 F.3d 371 (4th Cir. 1994).
18 Continental Casualty Co. v. Fuscardo, 35 F.3d 963, 966 (4th Cir.
1994).
19 Nautilus, 15 F.3d at 377 (quoting 6A J. Moore, B. Ward & J. Lucas,
Moore's Federal Practice, ¶57.08[5] (2d ed. 1993)).
20 Reply Br. at 6.
6
useful purpose in clarifying and settling the legal relations in issue,"
and (2) "will terminate and afford relief from the uncertainty, insecu-
rity, and controversy giving rise to the proceeding."21 We disagree.
There is no requirement that a parallel proceeding be pending in
state court before a federal court should decline to exercise jurisdic-
tion over a declaratory judgment action.22 Rather, as the district court
stated, "[t]he existence or nonexistence of a state court action is sim-
ply one consideration relevant to whether to grant declaratory relief."23
To hold otherwise would in effect create a per se rule requiring a dis-
trict court to entertain a declaratory judgment action when no state
court proceeding is pending. Such a rule would be inconsistent with
our long-standing belief that district courts should be afforded great
latitude in determining whether to grant or deny declaratory relief.
Of course, we do not seek to diminish the importance of a parallel
state court proceeding in a district court's decision. Clearly, the exis-
tence of such a proceeding should be a significant factor in the district
court's determination. But it is not dispositive. Rather, even in the
absence of a state court proceeding, the criteria outlined in Quarles,
as well as the considerations of federalism, efficiency, comity, and
procedural "fencing," continue to be factors which the district court
should balance when determining whether to assert jurisdiction over
a declaratory judgment action. A district court does not exceed the
bounds of its discretion when an appraisal of these factors weighs in
favor of denying declaratory relief.
This is particularly true, when, as here, there are bona fide reasons
for the lack of any pending state court action. The district court
accepted Ind-Com's representation that the state of North Carolina
will be an inevitable party to any claim it asserts. However, because
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21 Quarles, 92 F.2d at 325 (quoting Edwin M. Borchard, Declaratory
Judgments 107-09 (1934)).
22 See Golden Eagle Ins. Co. v. Travelers Co.'s, 103 F.3d 750, 754 (9th
Cir. 1996) (stating that "the absence of a parallel state proceeding is not
necessarily dispositive; the potential for such a proceeding may suffice.")
(citation omitted); accord Budget Rent-A-Car v. Crawford, 108 F.3d
1075, 1080 (9th Cir. 1997).
23 J.A. at 108.
7
the Project is public, Ind-Com's claim resolution process is governed
by N.C.G.S. § 143-135.3, which does not allow a contractor to insti-
tute a civil action against the State until it has exhausted certain
administrative remedies.24 Absent some type of settlement, the district
court found it inevitable that Ind-Com would eventually file a state
action not only against Aetna, but also against Lott, the State, and
Odell.25
V.
Applying the foregoing principles to the present case, we cannot
find that the district court "overstepped the bounds of its discretion"26
in dismissing Aetna's declaratory judgment action. To the contrary,
our review of the record indicates that the district court carefully con-
sidered the requisite factors in concluding that: (1) this case raises
important issues of unclear state law in which the state of North Caro-
lina has an important interest; (2) deciding this case would do little
to clarify the legal relations between the parties or afford relief from
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24 See N.C.G.S. § 143-135.3 (1996). This section does not allow an
action to proceed against the State until the civil contractor has: (1) com-
pleted its contract; (2) received a final denial from the project architect
of the additional compensation it seeks; (3) submitted a verified written
claim to the director of the Office of State Construction of the Depart-
ment of Administration; and (4) received a written statement of the direc-
tor's decision on its claim.
25 We note that the district court's prediction has come to pass since we
heard oral argument in this case. By letter dated February 6, 1998, Ind-
Com advised this court that it had exhausted its administrative remedies,
and had thus filed a state court action. Included in this action are the
same claims that Aetna asserted in seeking a declaratory judgment.
While this development confirms the inevitability of the state court
proceeding, it does not affect our analysis here,"for we review the dis-
trict court's decision to dismiss this action on the basis of the situation
that confronted it at the time it made that decision. . . without regard to
any later developments -- unless, of course, those developments are suf-
ficient to render this entire action moot." Nautilus, 15 F.3d at 379 (cita-
tion omitted). Ind-Com's filing of a parallel state court proceeding has
not rendered this dispute moot.
26 Nautilus, 15 F.3d at 378.
8
uncertainty; (3) allowing this case to go forward would produce
piecemeal litigation; and (4) Aetna was using the declaratory relief
mechanism to engage in procedural fencing and forum shopping.
"[F]acts bearing on the usefulness of the declaratory judgment rem-
edy, and the fitness of the case for resolution, are particularly within
[the district court's] grasp."27 Consequently, we will not second-guess
the district court's balancing of the determinative considerations.
VI.
To summarize, we hold that a district court does not per se overstep
the bounds of its discretion when it dismisses a declaratory judgment
action in the absence of a pending parallel state court proceeding.
Rather, such a dismissal is within the district court's discretion, and
that discretion is not abused so long as the factors which we have enu-
merated to guide district courts in this determination weigh in favor
of denying declaratory relief. As we hold that the district court cor-
rectly determined that those factors weighed in favor of dismissal, we
affirm the district court's determination declining to exercise jurisdic-
tion over Aetna's declaratory judgment action.
AFFIRMED
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27 Wilton, 515 U.S. at 289 (citation omitted).
9