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Cincinnati Insurance Co. v. Tennessee Log Homes

July 25, 2008

CINCINNATI INSURANCE COMPANIES, PLAINTIFF,
v.
TENNESSEE LOG HOMES, INC., DENNIS SMITH, AND LAURIE SMITH, DEFENDANTS.



The opinion of the court was delivered by: Harry S. Mattice, Jr. United States District Judge

Judge Mattice

MEMORANDUM AND ORDER

Plaintiff Cincinnati Insurance Companies brings this declaratory judgment action against Defendants Tennessee Log Homes, Inc. ("TLH") and Dennis and Laurie Smith pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, and Federal Rule of Civil Procedure 57, seeking a declaration of its rights and duties under two insurance policies issued to TLH. TLH filed a counterclaim against Cincinnati Insurance Companies, seeking a declaration regarding Cincinnati Insurance Companies' liability under the policies.

Before the Court is Plaintiff's Motion for Summary Judgment [Court Doc. 27]. For the reasons explained below, Plaintiff's Motion for Summary Judgment will be GRANTED.

I. GRAND TRUNK ANALYSIS

As stated above, Plaintiff seeks a judgment in the instant action under the Declaratory Judgment Act. The Declaratory Judgment Act grants district courts discretionary jurisdiction over actions within its purview. 28 U.S.C. § 2201 (providing that a court "may declare the rights and other legal relations of any interested party seeking such declaration"). This statutory discretion is broad, but not unbounded.

The Sixth Circuit provides specific guidance to district courts faced with the decision of whether to entertain a declaratory judgment claim. District courts should consider the following:

(1) whether the declaratory action would settle the controversy; (2) whether the declaratory action would serve a useful purpose in clarifying the legal relations in issue; (3) whether the declaratory remedy is being used merely for the purpose of "procedural fencing" or "to provide an arena for a race for res judicata[";] (4) whether the 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.

Grand Trunk W. R.R. Co. v. Consol. Rail Corp., 746 F.2d 323, 326 (6th Cir. 1984).

In this case, the Grand Trunk factors militate in favor of exercising jurisdiction. First, the declaratory action would settle the controversy between the Plaintiff and the Defendants. In instances where there is a pending underlying state court proceeding in which the insurer is not involved, the declaration of a federal court would not resolve any matter at issue in the underlying case, which weighs in favor of declining to exercise jurisdiction. See U.S. Fire Ins. Co. v. Albex Aluminum, Inc., 161 Fed. App'x 562, 564-65, 2006 WL 41185, at *3 (6th Cir. Jan. 6, 2006) (per curiam); Allstate Ins. Co. v. Mercier, 913 F.2d 273, 278 (6th Cir. 1990). In this instance, however, the underlying state court case is no longer pending, so a declaration in this case would settle the controversy.

Second, for similar reasons, a declaratory action would serve a useful purpose in clarifying the legal relations in issue. The legal relations among the Defendants have been clarified in the underlying state court action and all that remains is the question of indemnity. As a result, this declaratory action would serve to clarify the legal relations between the Plaintiff and Defendants. Cf. U.S. Fire Ins. Co., 161 Fed. App'x at 565, 2006 WL 41185, at *3.

Third, there is no evidence to suggest that Plaintiff is seeking a procedural advantage or acting in bad faith.

Fourth, there is no possibility of friction between federal and state courts because there is no state court action pending. Further, the Circuit Court of Marinette County, Wisconsin has indicated that it is deferring to this federal court action. (Court Doc. 44-4 at 2.)

Fifth, although there is an alternative remedy -- a declaratory action in the Circuit Court of Marinette County, Wisconsin, the court where the underlying case was litigated -- and such alternative remedy is ordinarily considered preferable to a federal declaratory judgment action, see Manley, Bennett, McDonald & Co. v. St. Paul Fire & Marine Ins. Co., 791 F.2d 460, 463 (6th Cir. 1986), the Wisconsin state court has indicated that it is deferring to the action pending in this Court. (Court Doc. 44-4 at 2.) As a result, the preferred remedy is not one that is open to the Plaintiff.

Accordingly, the Court concludes that the Grand Trunk factors, considered as a whole, weigh in favor of exercising jurisdiction over this case and jurisdiction over Plaintiff's declaratory judgment action is ACCEPTED under 28 U.S.C. § 2201.

II. STANDARD

Summary judgment is proper where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). In ruling on a motion for summary judgment, the Court must view the facts contained in the record and all inferences that can be drawn from those facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); National Satellite Sports, Inc. v. Eliadis Inc., 253 F.3d 900, 907 (6th Cir. 2001). The Court cannot weigh the evidence, judge the credibility of witnesses, or determine the truth of any matter in dispute. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).

The moving party bears the initial burden of demonstrating that no genuine issue of material facts exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). To refute such a showing, the nonmoving party must present some significant, probative evidence indicating the necessity of a trial for resolving a material factual dispute. Id. at 322. A mere scintilla of evidence is not enough. Anderson, 477 U.S. at 252; McLean v. Ontario, Ltd., 224 F.3d 797, 800 (6th Cir. 2000). The Court's role is limited to determining whether the case contains sufficient evidence from which a jury could reasonably find for the nonmoving party. Anderson, 477 U.S. at 248-49; National Satellite Sports, 253 F.3d at 907. If the nonmoving party fails to make a sufficient showing on an essential element of its case with respect to which it has the burden of proof, the moving party is entitled to summary judgment. Celotex, 477 U.S. at 323. If the Court concludes that a fair-minded jury could not return a verdict in favor of the nonmoving party based on the evidence presented, it may enter a summary judgment. Anderson, 477 U.S. at 251-52; Lansing Dairy, Inc. v. Espy, 39 F.3d 1339, 1347 (6th Cir. 1994).

III. BACKGROUND

A. Facts

The relevant facts, viewed in the light most favorable to the nonmoving party, are as follows.

In August 2002, Dennis and Laurie Smith ("Smiths") filed suit against TLH, as well as several other defendants, in a Wisconsin state court. (Court Doc. No. 1-1, Compl. ¶ 8.) TLH's insurer, Cincinnati Insurance Companies, defended TLH in that action under a reservation of rights. (Id. ¶ 12.) The lawsuit was submitted to arbitration and the arbitrator issued a decision and award on September 10, 2004. (Id. ¶ 13; Court Doc. No. 1-6, Decision & Award.) This award was made into a Judgment against TLH by the Wisconsin state court on December 16, 2004. (Court Doc. No. 28-5, Smith v. Diversified Constr. Servs., Inc., No. 02-CV-252, slip op. (Wis. Cir. Ct. Dec. 16, 2004)).

The dispute between the Smiths and TLH derived from a purchase agreement regarding a log home. (Id. at 1.) Pursuant to a purchase agreement dated March 27, 2001, and effective on April 20, 2001, the Smiths agreed to purchase from TLH certain materials for the partial construction of a log home pursuant to schematic plans supplied by the Smiths and refined and adapted for the use of TLH products by TLH. (Id.) The log home was to be constructed from TLH's and other materials and according to TLH's plans by Diversified Construction Services, Inc. ("Diversified"). (Id.) TLH was merely a product supplier and Diversified was the builder. (Id.)

Paragraph 6 of the purchase agreement stated that "[a]ll log home packages of Seller [TLH] meet the structural requirements of most local building codes . . . ." (Id. at 1- 2.) The arbitrator concluded that the designs produced by TLH for the Smiths' home did not meet local building codes, primarily because of the deletion of two support poles/columns that should have been included. (Id. at 2.) The house was built according to the design produced by TLH, and as a result of the deletion of the two support poles/columns, there was substantial movement of the home, including numerous surface irregularities on the roof and a thrusting outward of the exterior walls. (Id.) The arbitrator found that the damage related to the roof design deficiency was $65,000 and the damage related to the thrusting outward of the walls was $30,000. (Id. at 3.)

The arbitrator also concluded that Diversified's work was defective in numerous respects and awarded the Smiths $44,000 related to those deficiencies. (Id. at 4-6.) Cincinnati Insurance Companies has already agreed to indemnify TLH for the $44,000 related to ...


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