Banks Eng'g, Inc. v. Nationwide Mutual Ins. Co. ( 2022 )

NOT RECOMMENDED FOR PUBLICATION
File Name: 22a0040n.06
No. 21-5652
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
) Jan 24, 2022
BANKS ENGINEERING, INC.,
) DEBORAH S. HUNT, Clerk
Plaintiff-Appellee, )
)
v. ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR
NATIONWIDE MUTUAL INSURANCE ) THE EASTERN DISTRICT OF
COMPANY; NATIONAL CASUALTY ) KENTUCKY
COMPANY, )
Defendants-Appellants. )
)
Before: SUHRHEINRICH, WHITE, and STRANCH, Circuit Judges.
SUHRHEINRICH, Circuit Judge. Banks Engineering, Inc. was sued in a Kentucky court
for, among other things, committing professional negligence. It sought defense and indemnity
from its professional-liability insurer, Nationwide Mutual Insurance Company.1 After Nationwide
denied coverage, Banks brought this declaratory action in state court, and Nationwide removed it
to the U.S. District Court for the Eastern District of Kentucky. That court declined to exercise
jurisdiction and remanded the case to state court, which Nationwide now appeals. Because the
district court did not abuse its discretion, we affirm.
I.
We first recount the facts underlying the Kentucky suit against Banks before turning to the
facts directly relevant here.
1
The insurance policy was underwritten by co-defendant National Casualty Company. For simplicity’s sake, we refer
to both defendants as “Nationwide.”
No. 21-5652, Banks Eng’g, Inc. v. Nationwide Mutual Ins. Co., et al.
State-Court Action. In 2018, LPW Redevelopment owned a piece of real property in
Nicholasville, Kentucky, which was divided into four parcels. LPW contracted with Banks to
provide engineering and consulting services related to developing Parcel 3 into a residential
subdivision. Banks prepared for LPW, among other things, a preliminary subdivision plat and
final development plan for Parcel 3.
Those documents, as well as LPW’s previously approved and recorded construction plans
for Parcel 2, showed a box culvert (i.e., a stream crossing) within Parcel 2. The Nicholasville
Planning Commission approved LPW’s construction plans for Parcel 2 without requiring LPW to
provide surety for construction of the box culvert. LPW partially developed Parcel 2, but it did
not build the box culvert.
In 2018, Boone Development, LLC purchased Parcel 3 from LPW. When Boone
purchased the parcel, it assumed LPW’s rights and obligations under LPW’s contract with Banks
regarding the development of Parcel 3. Boone also agreed to pay Banks for the engineering
services needed to finish developing Parcel 3.
In July 2019, Boone’s principal met with the Nicholasville City Engineer to discuss the
sureties Boone would be required to post before the Planning Commission approved the
development plans for Parcel 3. The engineer said that Boone—despite not owning Parcel 2—
would be required to post a surety of roughly $200,000 for construction of the box culvert on
Parcel 2. The Commission ultimately explained that Boone was responsible for the culvert
(regardless of whether Boone or LPW owned the land under the planned culvert) because “it was
depicted on the Preliminary Plat and the construction plans for Parcel 3”—the documents Banks
had prepared earlier. Hence, Boone claims Banks wrongly obligated it to foot the bill for the
culvert.
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No. 21-5652, Banks Eng’g, Inc. v. Nationwide Mutual Ins. Co., et al.
In March 2020, Boone and a related entity sued Banks, the Planning Commission, several
of its Commissioners, its Chairman, its Planning Director/Administrative Officer, and the City
Engineer in Kentucky court (the “State-Court Action”). Boone raised a variety of state and federal
constitutional, tort, contractual, and equitable claims against those defendants, all of which relate
to whether Boone must either post surety or pay for the box culvert. As relevant here, Boone
alleged three claims against Banks: (1) breach of contract because Banks refused to continue
working for Boone to fully develop Parcel 3, (2) unjust enrichment for money previously paid to
Banks, in part by LPW, for work yet to be performed, and (3) professional negligence in preparing
the construction plans, if Boone is ultimately required to post surety or pay for the box culvert.
The State-Court Action apparently remains pending, although the parties’ briefing here is sparse
on that point.
Banks’s Declaratory Action Against Nationwide. Banks purchased an Architects and
Engineers Professional Liability Insurance Policy from Nationwide.2 Shortly after Boone filed the
State-Court Action, Banks notified Nationwide of the lawsuit and requested coverage under the
Policy. In April 2020, Nationwide denied coverage, asserting that Boone’s claim of professional
negligence was not made during the Policy’s coverage period, Banks’s alleged professional
negligence occurred prior to the Policy’s coverage period, and Banks failed to disclose the
possibility of the claim when it applied for the Policy.
Banks then filed this action, which seeks a declaration that Nationwide is “obligated to
provide insurance coverage, including defense and indemnity[,] to [Banks] pursuant to the terms
and conditions of the Policy.” Banks filed the suit in a Kentucky court, but Nationwide timely
2
The Policy provides defense-and-indemnity coverage for claims made and reported between December 7, 2019, and
December 7, 2020, and retroactively applies to any claim arising from a wrongful act occurring on or after December
7, 2014.
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No. 21-5652, Banks Eng’g, Inc. v. Nationwide Mutual Ins. Co., et al.
removed it to the U.S. District Court for the Eastern District of Kentucky based on diversity
jurisdiction. Banks thereafter moved to remand the case back to state court, arguing that
Nationwide failed to adequately prove that the amount in controversy exceeded $75,000, or,
alternatively, that the court should decline to exercise its discretion to hear the declaratory action.
The district court rejected the first argument but accepted the second. After analyzing the
factors that guide whether a federal court should exercise jurisdiction over a declaratory action,
see generally Grand Trunk W.R.R. Co. v. Consol. Rail Corp., 746 F.2d 323 (6th Cir. 1984), it
granted Banks’s motion to remand. Nationwide timely appealed.
II.
The Declaratory Judgment Act provides that “[i]n a case of actual controversy within its
jurisdiction, . . . any court of the United States . . . 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). That “may” goes a long way—it gives district courts
“unique and substantial discretion in deciding whether to declare the rights of litigants.” Scottsdale
Ins. Co. v. Flowers, 513 F.3d 546, 554 (6th Cir. 2008) (quoting Wilton v. Seven Falls Co., 515
U.S. 277, 286 (1995)). And for good reason: “[d]istrict courts must be afforded substantial
discretion to exercise jurisdiction ‘in the first instance, because facts bearing on the usefulness of
the declaratory judgment remedy, and fitness of the case for resolution, are peculiarly within their
grasp.’” Id. (quoting Wilton, 515 U.S. at 289).
We thus ask only whether the district court abused its discretion in deciding to hear (or not
hear) a declaratory-judgment action. W. World Ins. Co. v. Hoey, 773 F.3d 755, 758 (6th Cir. 2014).
To guide that discretion, district courts apply the Grand Trunk factors:
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No. 21-5652, Banks Eng’g, Inc. v. Nationwide Mutual Ins. Co., et al.
(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 res judicata;”
(4) whether the use of a declaratory action would increase the friction between our
federal and state courts and improperly encroach upon state jurisdiction; [which is
determined by asking]
a. whether the underlying factual issues are important to an informed
resolution of the case;
b. whether the state trial court is in a better position to evaluate those factual
issues than is the federal court; and
c. whether there is a close nexus between underlying factual and legal issues
and state law and/or public policy, or whether federal common or statutory
law dictates a resolution of the declaratory judgment action; and
(5) whether there is an alternative remedy which is better or more effective.
Id. at 759 (alteration in original) (quoting Flowers, 513 F.3d at 554, 560); see also Grand
Trunk, 746 F.2d at 326 (primary factors); Bituminous Cas. Corp. v. J. & L Lumber Co., Inc., 373
F.3d 807, 814–15 (6th Cir. 2004) (subfactors). “‘[W]e have never indicated’ the relative weights
of th[ose] factors”—we leave that too to the district court’s discretion, to be judged based on the
facts of each case. United Specialty Ins. Co. v. Cole’s Place, Inc., 936 F.3d 386, 396 (6th Cir.
2019) (quoting Flowers, 513 F.3d at 563).
Given that substantial discretion, our review is quite modest. “The essential question is
always whether a district court has taken a good look at the issue and engaged in a reasoned
analysis of whether issuing a declaration would be useful and fair.” Id. at 402 (alteration omitted)
(quoting Hoey, 773 F.3d at 759). Three core lodestars guide “our own review”—“efficiency,
fairness, and federalism.” Hoey, 773 F.3d at 760.
Practically speaking, so long as the district court offered a reasoned basis for declining
jurisdiction, we generally do not substitute our judgment for its. For example, reversal is not
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warranted just because we think, based on the facts of the case, that the district court wrongly
emphasized one or more of the Grand Trunk factors. Scottsdale Ins. Co. v. Roumph, 211 F.3d 964,
968–69 (6th Cir. 2000). Nor is it sufficient that another court, faced with the same facts, reasonably
might have reached a different result. See id.; Mass. Bay Ins. Co. v. Christian Funeral Dirs., Inc.,
759 F. App’x 431, 443 (6th Cir. 2018) (citing Hoey, 773 F.3d at 760–61). At bottom, we are
“reluctant to reverse a district court’s decision to decline jurisdiction.” Mass. Bay, 759 F. App’x
at 442. Only rarely have we done so—by our count, just once—under the post-Wilton abuse-of-
discretion standard. See Byler v. Air Methods Corp., 823 F. App’x 356, 365 (6th Cir. 2020)
(finding that district court abused its discretion by failing to apply the Grand Trunk factors and
providing “only three lines of analysis explaining its decision to decline jurisdiction”).
III.
The district court here dutifully trekked through the Grand Trunk factors and opted to
remand the case to state court. We first recount the district court’s analysis before turning to
Nationwide’s objections to it.
A.
As for the first and second Grand Trunk factors, the district court found that a declaration
likely would neither “end the controversy” nor “provide complete clarity regarding the parties’
legal relations.” The court reasoned that, while a declaration could “settle some questions
regarding contract interpretation,” it was also “likely that other questions would remain
outstanding until the underlying state-court claims against Banks are resolved.” For one thing,
because the plaintiffs in the State-Court Action are not parties to this suit, the court reasoned that
the declaration sought by Banks would not bind them. For another, it noted that common factual
issues were implicated by both actions—e.g., the timing and substance of the engineering services
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No. 21-5652, Banks Eng’g, Inc. v. Nationwide Mutual Ins. Co., et al.
that Banks provided for Boone and LPW. Those factual issues were not hypothetical; the parties’
joint Rule 26(f) planning-conference report anticipated that discovery would be needed as to “the
events and circumstances leading to the allegations in the [State-Court Action] against [Banks].”
Because of these overlapping factual issues and non-overlapping parties, the court found that the
first two factors both weighed in favor of remand. We find no error in that. See Travelers Indem.
Co. v. Bowling Green Pro. Assocs., PLC, 495 F.3d 266, 272 (6th Cir. 2007) (finding the absence
of state-court parties in the declaratory action weighed against exercising jurisdiction).
The district court next found that the third factor—whether this case involves procedural
fencing or a race to res judicata—“points toward exercising jurisdiction.” It noted that Banks, as
the insured, is the declaratory plaintiff here; Banks filed the suit in state court, and Nationwide
removed it to federal court. The court found that that distinguishes this case from those less fit for
a federal declaratory judgment—those in which “declaratory plaintiffs . . . file their suits mere days
or weeks before the coercive suits filed by a ‘natural plaintiff’” to “acquir[e] a favorable forum”
in federal court. Flowers, 513 F.3d at 558 (quoting AmSouth Bank v. Dale, 386 F.3d 763, 788 (6th
Cir. 2004)).
We agree that that’s a meaningful distinction, but we might quibble with the conclusion;
this factor seems neutral at best. Banks, as the natural plaintiff in a coercive suit against
Nationwide for declining insurance coverage, wants to be in state court and filed the case there
first. It might be one thing if Nationwide was the first to file in federal court (and there otherwise
was no evidence of procedural fencing). See, e.g., Flowers, 513 F.3d at 558. But it seems unfair
to give Nationwide a point on its Grand Trunk scorecard simply for waiting for Banks to file and
then removing that case to its preferred forum. We thus think this factor is neutral. See Cole’s
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Place, 936 F.3d at 399 (noting that “we often find that the factor is ‘neutral’” when “there is no
evidence of procedural fencing” (quoting Travelers, 495 F.3d at 272)).
The court then addressed the fourth factor (and its three subfactors): whether hearing the
declaratory action would increase friction between federal and state courts, because the declaratory
action (a) requires the finding of facts already being found in state court, (b) is thus best heard by
the state court, and (c) implicates state, rather than federal, policies. In the district court’s view,
this case checked all three boxes.
The court first noted that Banks’s declaratory suit does not appear to raise purely legal
questions, but rather likely “require[s] making factual findings that might conflict with similar
findings made by the state court.” Flowers, 513 F.3d at 560. Second, it cited to Travelers, in
which we observed that “issues of ‘insurance contract interpretation are questions of state law with
which the Kentucky state courts are more familiar and, therefore, better able to resolve.’” 495 F.3d
at 273 (quoting Bituminous Cas. Corp., 373 F.3d at 815). Third, it identified no federal policies
implicated by Banks’s case, and it noted that Kentucky courts are best situated to “identify and
enforce the public policies that form the foundation of insurance regulation.” Accordingly, it
found that the fourth factor favored remand.
We see no error in that analysis. The parties provided (both here and below) scant briefing
as to the status and scope of the State-Court Action, so the court was within its discretion to err on
the side of caution regarding the first subfactor. See Mass. Bay, 759 F. App’x at 439–41; Allstate
Ins. Co. v. Mercier, 913 F.2d 273, 278–79 (6th Cir. 1990) (reversing exercise of jurisdiction where
issuing declaration was premature and could interfere with ongoing state proceedings), abrogated
on other grounds by Wilton, 515 U.S. at 289–90. The court’s analysis of the second and third
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subfactors likewise fits within our cases. See Travelers, 495 F.3d at 273; Bituminous, 373 F.3d at815–16. We thus agree that the fourth factor favored remand.
As for the fifth factor—whether an alternative remedy is available to a federal declaratory
action—the court found that, because Banks could (and did) seek a declaration in Kentucky’s
courts under Ky. Rev. Stat. § 418.040, this factor also weighed in favor of remand. We agree.
See, e.g., Cole’s Place, 936 F.3d at 401 (finding the same, considering Ky. Rev. Stat. § 418.040);
Travelers, 495 F.3d at 273 (same); Bituminous, 373 F.3d at 816–17 (same).
Balancing the five factors, the district court found that “[t]hey point heavily toward
remand;” it reasoned that “this case is so closely connected with matters being litigated in state
court” and that the State-Court Action “has been pending for more than a year and it is clear that
the state courts and the parties have invested substantial time and resources in the matter.” Based
on that finding, and reasoning that federal courts should exercise jurisdiction over declaratory
actions “only when doing so would advance the interests of justice or preserve the resources of the
parties,” the court granted Banks’s motion to remand.
We find no reversible error. The court took “a good look at the issue and engaged in a
reasoned analysis of whether issuing a declaration would be useful and fair,” and its conclusions
reflect our core considerations of “efficiency, fairness, and federalism.” Hoey, 773 F.3d at 759,
760. At the very least, the court’s reasoned exercise of discretion did not come close to the rare
case that warrants reversal. See Byler, 823 F. App’x at 365 (finding abuse of discretion due to
“[t]he district court’s minimal analysis and its disregard of the Grand Trunk factors”); see also
Mass. Bay, 759 F. App’x at 442 (noting our “reluctan[ce] to reverse a district court’s decision to
decline jurisdiction”). The court did not, therefore, abuse its discretion in remanding Banks’s
action.
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B.
Nationwide disagrees, devoting most of its briefing to the first two Grand Trunk factors.
It starts by arguing that the court overlooked two facts, not at issue in the State-Court Action, that
“would be dispositive of Banks’s action and thus settle the controversy.” First, Nationwide
contends it has no duty to defend or indemnify Banks under the Policy because “the [State-Court
Plaintiffs’] claim against Banks’ [sic] was first made prior to the Policy period”—a fact that,
Nationwide says, “is not at issue in the” State-Court Action. Second, Nationwide argues it has no
duty to defend or indemnify under the Policy because “Banks failed to identify the [State-Court
Plaintiffs’] claim on its application” for the Policy. In Nationwide’s view, because those facts
would be dispositive of Banks’s declaration for insurance coverage, the district court erred by
finding that a declaration would not “settle the controversy.”
However strong those arguments may be, the problem is that Nationwide did not make
them below.3 Had Nationwide done so, the district court may have reached a different conclusion
or weighed the Grand Trunk factors differently. But we cannot say that the court abused its
discretion by failing to apprehend facts or arguments that it was not asked to consider.
Nationwide next claims the district court misidentified two factual issues as overlapping
with the State-Court Action: (1) when Banks’s alleged professional negligence occurred, and
(2) the nature of Banks’s professional services regarding the box culvert. As to the first,
Nationwide argues that it’s the substance, not timing, of Banks’s work that is currently at issue in
the State-Court Action. Fair enough. But, as the district court correctly reasoned, the question of
3
In its opposition to Banks’s motion to remand, Nationwide provided a conclusory, single-sentence argument as to
the first two Grand Trunk factors: “Resolution of the question of whether Nationwide has a duty to defend Banks in
the State Court Action and to indemnify it for any damages will settle the controversy between Banks and Nationwide
and will clarify the current legal obligations between them.”
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timing would inevitably arise in the State-Court Action, even if it’s not at issue now: (a) if Boone
is held liable for the cost of the box culvert, (b) Boone would seek to impose liability on Banks,
and (c) Banks would then seek indemnification from Nationwide, which would require
determining whether Banks’s alleged professional negligence (timing-wise and substantively) is
covered by the Policy. See Hoey, 773 F.3d at 760.
As for the second fact, Nationwide faults the district court for not explaining specifically
how the nature of Banks’s professional services is implicated by both this action and the State-
Court Action. But the district court, in issuing a declaration as to insurance coverage, would of
course have to determine whether Banks’s alleged negligence is covered by the Policy—which
would in turn call for examining the services that Banks (allegedly negligently) provided to Boone,
facts directly at issue in the State-Court Action. Further, the district court did not pull this fact out
of nowhere; it relied on Banks’s and Nationwide’s joint Rule 24(f) planning report, which
anticipated discovery regarding “the events and circumstances leading to the allegations in the
[State-Court Action]” against Banks. In other words, Nationwide itself admitted, in the joint
planning report, that the declaratory action would involve a factual inquiry that overlaps with the
State-Court Action. We cannot fault the district court for relying on that.
Nationwide’s arguments as to Grand Trunk factor four and its three subfactors fail to move
the needle.4 Its arguments as to the first subfactor are largely a redux of previous ones—that the
court misidentified factual issues as overlapping with the State-Court Action because this case
involves only insurance-coverage issues not currently being litigated in state court. We reject
those for the reasons stated above. Nationwide also argues that the second and third subfactors
have “less force” here—federal courts in Kentucky “routinely” exercise jurisdiction over
4
Nationwide does not address Grand Trunk factor three.
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No. 21-5652, Banks Eng’g, Inc. v. Nationwide Mutual Ins. Co., et al.
declaratory actions like this, and this case (according to Nationwide) presents no novel questions
of state law. Maybe so, but that still “does not necessarily mean” the federal court was in a better
position than the state court to resolve the “factual issues relevant to the coverage question.”
Cole’s Place, 936 F.3d at 401. The second subfactor therefore favored remand. Finally,
Nationwide argues that the third subfactor weighed against remand because the legal issues in this
case “can be reasonably predicted” given how “well-developed” Kentucky insurance law is. But
that just as equally supported remand—“state courts are best situated to identify and enforce the
public policies that form the foundation of [insurance] regulation.” Flowers, 513 F.3d at 561(quoting Bituminous, 373 F.3d at 815); Cole’s Place, 936 F.3d at 401 (recognizing our adherence
to this principle “even in cases where state law has not been difficult to apply”). And, as stated
above, Banks’s case implicates no federal policies. The district court thus did not abuse its
discretion in finding the fourth Grand Trunk factor favored remand.
As for factor five, Nationwide argues that the mere existence of Kentucky’s declaratory-
judgment remedy (as an alternative to the federal declaratory judgment) does not counsel against
exercising jurisdiction. We disagree, as we have before—and in the specific context, no less, of
Kentucky’s declaratory-judgment remedy. Cole’s Place, 936 F.3d at 401 (considering Ky. Rev.
Stat. § 418.040); Travelers, 495 F.3d at 273 (same); Bituminous, 373 F.3d at 816–17 (same).
Moreover, Nationwide fails to adequately grapple with two key points that undercut most
of its arguments here: (1) no plaintiff in the State-Court Action is a party to this suit, which means
any declaration will not fully settle the controversy, see Travelers, 495 F.3d at 272; Bituminous,
373 F.3d at 814; Cole’s Place, 936 F.3d at 408 (White, J., dissenting) (citing Travelers and
Bituminous and reasoning that the first two Grand Trunk factors weigh against exercising
jurisdiction when the state-court plaintiff is not a party to the federal action); and (2) this case
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involves the denial, not exercise, of jurisdiction—a decision that we are generally “reluctant to
reverse,” Mass. Bay, 759 F. App’x at 442 (citing Roumph, 211 F.3d at 969). Considering that, we
are convinced that the district court did not abuse its discretion in declining jurisdiction.
IV.
For the foregoing reasons, we AFFIRM.
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