The Federal District Court for the District of Hawaii remanded the coverage case to state court after applying the Brillhart and Dizol factors. HK Holdings, LLC v. Avemco Ins. Co., 2021 U.S Dist. LEXIS 174039 (D. Haw. Sept. 14, 2021).
HK Holding was a limited liability company organized and existing under the laws of the State of Hawaii. It owned and operated the Jade Dynasty Seafood Restaurant. Defendant Avemco Insurance Company was organized and existed under the laws of the State of Maryland. HK Holding held a Employment Practice Liability Insurance Policy issued by Avemco. The policy covered loss for a “Wrongful Employment Act.”
HK Holdings was sued in a class action in state court. The complaint alleged that gratuity charges applied by the restaurant were not distributed 100% to the non-management employees as tip income. The class action suit alleged several violations of various state statutes.
Avemco denied coverage asserting that the complaint did not allege a “Wrongful Employment Act” and that the damages sought by the employees did not constitute a “Loss” as defined in the Policy.
HK Holdings filed suit in state court against Avemco, seeking a declaratory judgment that Avemco had a duty to defend and a duty to indemnify HK Holdings against the class action suit. Avemco removed the compliant to federal district court. HK Holdings filed a Motion to Remand, urging the federal court to avoid needless determinations of Hawaii state insurance law and to avoid duplicative litigation with the on-going class action suit in state court.
The federal court noted it had discretion under the Declaratory Judgment Act to exercise its jurisdiction when the complaint was limited to declaratory relief. The court analysed the three factors set forth in Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942) in evaluating whether to decline jurisdiction over a complaint limited to declaratory relief.
The court first determined that there were parallel state court proceedings. Both the underlying class action suit and the Declaratory Judgment Complaint involved overlapping factual circumstances. Both cases required factual determinations as to the employment practices of HK Holdings. The existence of the parallel state court proceedings weighed strongly in favor of the court exercising its discretion to decline to exercise jurisdiction.
The court also noted that insurance law was regulated by the states. The class action suit asserted violations of several Hawaii state statutes. This factor supported a finding that the federal proceeding could involve the federal court making unnecessary determinations of state law.
The court found no compelling federal interest in the case. The court, however, found the forum shopping prong neutral. There was no evidence that the case was brought merely for procedural fencing and there was no evidence that Avemco’s removal was reactionary or for an improper purpose.
There was concern over duplicative litigation. Facual issues in the underling class action suit paralleled the factual issues that had to be resolved in the insurance coverage case. The central factual question in the coverage dispute concerned whether HK Holdings engaged in a Wrongful Employment Practice. The class action suit involved overlapping issues with respect to HK Holdings and its employment practices. Therefore, the Brillhart facts favored remanding the proceedings.
Turning to the factors utilized by the Ninth Circuit in Gov’t Emps. Ins. Co. v. Dizol, 133 F.3d 1220 (9th Cir. 1998), the court found that the declaratory action in federal court would not settle all aspects of the controversy. Second, although the declaratory judgment action would serve a useful purpose in clarifying the legal relationship between HK Holdings and Avemco, it would not serve to streamline the underlying class action proceedings. The two lawsuits had overlapping issues and maintaining actions in separate forums would entangle the state and federal court systems. Third, the state court forum would provide as convenient of a forum as the federal district court would and would avoid duplicative litigation. Finally, there were procedural considerations of maintaining suits in two separate forums that favored remanding proceedings.
Both the Brillhart and Dizol factors favored that the federal court exercise its discretion to remand proceedings.