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The Bar Plan Mutual Insurance Co. v. O'Brien

United States District Court, D. Kansas

May 3, 2017

The Bar Plan Mutual Insurance Company, Plaintiff,
v.
Christopher W. O'Brien, et al., Defendants.

          MEMORANDUM AND ORDER

          J. THOMAS MARTEN, JUDGE

         In 2015, plaintiff The Bar Plan (TBP) issued a legal malpractice insurance policy to the defendant Brown, Dengler, & O'Brien (BDO). In 2016, the bankruptcy trustee representing the former clients of Christopher O'Brien, one of the attorneys named as an insured in the BDO policy, commenced an action against O'Brien and BDO. J. Michael Morris, Trustee v. O'Brien, No. 16-5163 (Bankr. Kan.). TBP subsequently commenced this declaratory judgment action seeking a determination of its obligations under the policy.

         In Morris v. O'Brien, the Trustee alleges that O'Brien was the attorney for Roger and Marcia Altis, that he placed proceeds from the sale of their business, RCCA Well Service, into the BDO trust account, and then withdrew them for his personal use or benefit. The Trustee advances claims of conversion, fraud, and breach of fiduciary duty against O'Brien. He also seeks recovery against BDO, first under a respondeat respondeat superior theory, alleging that O'Brien was acting as the firm's agent, and second for negligent supervision of the BDO trust account.

         TBP has undertaken the defense of BDO in the bankruptcy action under a reservation of rights. It contends that BDO is not covered under the policy under two provisions. Under Exclusion A, the policy excludes coverage for “[a]ny dishonest, deliberately fraudulent, criminal, malicious or deliberately wrongful acts or omissions by an Insured.” The Exclusion does not apply if an insured was unaware of the fraud, but this limitation is inapplicable “to the extent that the act or omission underlying the Claim for Damages does not relate to or arise out of the defalcation by any Insured.” Second, Exclusion L bars claims “against an Insured who before the Policy effective date knew, or should reasonably have known, of any circumstance, act or omission that might reasonably be expected to be the basis of that Claim.” The matter is currently before the court on defendant BDO's motion to dismiss or stay the declaratory judgment action. BDO argues the court should abstain from hearing TBP's declaratory judgment action. According to BDO, the existence of coverage depends on issues of fact which will be resolved in Morris v. O'Brien.

         Where an independent parallel action is pending, a district court enjoys broad discretion to decline to exercise jurisdiction under the Declaratory Judgment Act. See Brillhart v. Excess Ins. Co. of America, 316 U.S. 491, 494 (1942). Such abstention serves both “considerations of practicality and wise judicial administration, ” Wilton v. Seven Falls Co., 515 U.S. 277, 288 (1995), and avoids “[g]ratuitous interference” with state proceedings. Brillhart, 316 U.S. at 495.

         In deciding whether to dismiss a declaratory judgment action, the district court should consider:

[1] whether a declaratory action would settle the controversy; [2] whether it would serve a useful purpose in clarifying the legal relations at issue; [3] whether the declaratory remedy is being used merely for the purpose of procedural fencing or to provide an arena for a race to res judicata; [4] whether use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction; and [5] whether there is an alternative remedy which is better or more effective.

State Farm Fire & Cas. Co. v. Mhoon, 31 F.3d 979, 983 (10th Cir.1994) (quotations omitted).

         TBP correctly points out that the cases cited by BDO all involve abstention premised on the existence of parallel state litigation. See Brillhart, 316 U.S. at 495, United States v. City of Las Cruces, 289 F.3d 1170, 1187 (10th Cir. 2002), St. Paul Fire & Marine Ins. Co. v. Runyon, 53 F.3d 1167, 1169 (10th Cir. 1995); State Farm Fire & Cas. Co. v. Mhoon, 31 F.3d 979, 983 (10th Cir.1994). In the present case, there is no parallel state litigation. Morris v. O'Brien is an adversarial bankruptcy proceeding.

         However, while the existence of state litigation may be an important factor supporting a decision to decline jurisdiction under the Declaratory Judgment Act, the court does not view it as fatal to defendant's motion.[1] Any exercise of jurisdiction under the Act is discretionary. See Public Affairs Press v. Rickover, 369 U.S. 111, 112 (1962) (“The Declaratory Judgment Act was an authorization, not a command. It gave the federal courts competence to make a declaration of rights; it did not impose a duty to do so.”); Green v. Mansour, 474 U.S. 64, 72 (1985) (Declaratory Judgment Act “is an enabling Act, which confers a discretion on the courts rather than an absolute right upon the litigant”).

         Nevertheless, the court finds in its discretion that the present matter should not be dismissed. First, even if the absence of state litigation is not in itself fatal to BDO's motion, it is clear that the federalism concerns typically present in Brillhart abstention cases is not present here. Thus, an exercise of jurisdiction would not serve to “increase the friction” between federal and state courts. Nor is there any indication that TBP has filed the present action as “procedural fencing, ” or in any manner other than as a bona fide attempt to obtain a resolution of the scope of coverage under the policy.

         The nature and extent of the policy language is the central issue in the present case, and may be effectively resolved by the present declaratory action. While the adversarial bankruptcy proceeding may touch on some of the issues in the present case, each case addresses issues and are tied factual questions which are not identical. The present case may effectively resolve the controversy over TBP's duty to defend the Morris action.

         In its Reply, BDO argues that the exclusion to the waiver to Exclusion A is inapplicable, since “there is no claim against BDO for a ‘dishonest, deliberately fraudulent, criminal, malicious, or deliberately wrongful act.'” (Dkt. 19, at 6). Thus, it reasons, “[b]ecause the exclusion set forth in the first sentence of Exclusion A. does not ...


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