United States District Court,

E.D. Pennsylvania.

DONALD J. KRAUSS et al., Plaintiffs,

v.

IRIS USA, INC. et al., Defendants.

CIVIL ACTION No. 17-778

|

11/22/2017

 

GENE E.K. PRATTER, UNITED STATES DISTRICT JUDGE

 

MEMORANDUM

PRATTER, J. NOVEMBER 20, 2017

INTRODUCTION

*1 The procedural posture of this case is already complicated, but the alleged facts are not. An autism charity in Pennsylvania contracted to buy Legos from a seller in Wisconsin. The seller hired a freight broker, who in turn hired a shipper to deliver the Legos. But, according to the charity buyers, the seller and shipper failed to load the Legos in the safe manner that the charity had requested. Instead, they used old pallets of the wrong size and dangerously stacked the pallets on top of each other. The shoddy loading damaged the Legos in transit and caused a pallet to crack during unloading, injuring a volunteer for the charity.

 

Now, the Court must rule on (1) a motion to dismiss the first amended complaint, (2) a motion to strike the second amended complaint, and (3) a motion for leave to file a second amended complaint.

 

The Court exercises its discretion to grant the plaintiffs leave to file their second amended complaint, which moots the motion to strike in the process. As to the merits of the motion to dismiss, the state-law claims against defendant KV Load are preempted by the federal Carmack Amendment. Finally, for the sake of clarity, the Court grants the plaintiffs leave to file a third amended complaint consistent with this opinion and accompanying order.

 

 

FACTS

1. The Parties

The plaintiffs are a cluster of charities (Fight Back, JC Rehab, and CGB Rehab), the charities’ President and CEO (Cindy G. Brillman), and a volunteer for Fight Back (Donald J. Krauss). Collectively, the plaintiffs help autistic people secure medical services.

 

The defendants are IRIS, a Wisconsin corporation that manufactures and distributes plastic storage products (for immediate purposes, Lego baseplates); C.H. Robinson Worldwide, a Delaware freight broker hired by IRIS to coordinate the Lego shipment to one of the plaintiff charities; and KV Load, a shipper from Illinois that C.H. Robinson hired to deliver IRIS’s shipment of Legos to the charity.

 

 

1. The Main Charity-Plaintiff Contracts to Buy Legos from IRIS

The main charity-plaintiff in this case is Fight Back (short for “Fightback for Autism”). In early 2015, Fight Back’s CEO, Ms. Brillman, contracted with IRIS to buy a shipment of Lego baseplates, which are plastic platforms for building with Lego blocks. Lego baseplates are stored and shipped on pallets, and the purchase agreement contained two specifications about the shipment:

1. Pallet Size: IRIS would use larger (40” x 48”) pallets, not the smaller “European style” (31” x 47”) pallets that Legos are usually shipped on.
2. Pallet Stacking: IRIS would ensure that the pallets were not double-stacked in the trailer during the trip from Wisconsin to Pennsylvania.

 

 

1. The Delivery Reveals Sloppy Loading

IRIS hired C.H. Robinson, a freight broker, to handle shipping the Legos. In turn, C.H. Robinson hired KV Load, a shipping company, to pick up the Legos in Wisconsin and deliver them to Fight Back in Pennsylvania. KV Load picked up the shipment from IRIS on February 19, 2015, and arrived at Fight Back’s headquarters in Pennsylvania the next day.

 

*2 From the start, there were problems with the shipment. The Legos were stacked on European-style pallets, not the larger pallets specified in the contract. These particular European-style pallets were substandard; in some, the wood was deteriorating. The pallets were also double-stacked in contravention of the agreement. Many pallets had shifted during the trip; some of the top-stacked pallets were hanging precariously over the edges of the bottom pallets. Lastly, the total load in the trailer was not properly balanced over the truck axles, increasing the risk that they could shift and crack in transit. In short, IRIS, C.H. Robinson, and KV Load had delivered a dangerous configuration of faulty pallets.

 

 

1. An Accident While Unloading

The KV Load driver unloaded the Lego shipment with the help of Donald J. Krauss, a Fight Back volunteer. According to the complaint, the KV Load driver failed to inspect the double-stacked pallets to ensure that they were configured in a structurally sound manner. Instead, the driver and Mr. Krauss developed a system in which the driver would move the double-stacked pallets from the front of the trailer to the rear of the trailer where Mr. Krauss, operating the forklift, picked them up. One double-stacked pallet, perched precariously on the edge of the trailer, collapsed and fell on top of Mr. Krauss. Crushed under thousands of pounds of pallet and Legos, Mr. Krauss suffered severe injuries.

 

 

1. The Plaintiffs’ Alleged Injuries

According to the complaint, some baseplates were damaged in transit and others damaged during the accident. Taking the damage in transit together with the damage from the accident, the complaint alleges: (1) emotional and physical injuries to Mr. Krauss as a result of the accident; (2) property damage to the baseplates and to the forklift Mr. Krauss was using during the accident; and (3) economic losses stemming from the damaged Legos.

 

 

PROCEDURAL HISTORY

The three charities, Ms. Brillman, and Mr. Krauss filed a complaint against IRIS (the seller), C.H. Robinson (the freight broker), and KV Load (the shipper).

 

After an initial motion to dismiss, the plaintiffs filed an amended complaint. The first amended complaint was met with another motion to dismiss from KV Load. Instead of responding to the motion to dismiss the amended complaint, the plaintiffs filed a second amended complaint. Both the first and second amended complaints advance five counts against the defendants:

1. Negligence against IRIS and C.H. Robinson;
2. Negligent infliction of emotional distress against all defendants;
3. Breach of contract against IRIS and C.H. Robinson;
4. Federal Carmack Amendment violations against KV Load; and
5. Negligence against KV Load.

 

KV Load moved to strike the second amended complaint. The plaintiffs responded with a new motion for leave to file the (already-filed) second amended complaint.

 

Thus the briefing now follows three parallel tracks: (1) the motion to strike the second amended complaint, (2) the motion for leave to file the second amended complaint, and (3) the motion to dismiss. The Court held oral arguments on all three motions.

 

 

DISCUSSION

As explained below, the Court first grants the plaintiffs’ motion for leave to file a second amended complaint and therefore moots KV Load’s motion to strike. Second, the Court concludes that Mr. Krauss’s personal injury claims against KV Load are preempted by the Carmack Amendment. Third, the Court addresses ancillary arguments that KV Load agreed to withdraw at oral argument. Fourth, the Court summarizes which claims remain in the case.

 

 

1. KV Load’s Motion to Strike and the Plaintiffs’ Motion for Leave

The Court grants the plaintiffs’ motion for leave to file a second amended complaint and moots KV Load’s motion to strike.

 

*3 By the plain text of Federal Rule of Civil Procedure 15(a)(2), the plaintiffs needed to get the Court’s (or the defendants’) permission to file the second amended complaint. See Fed. R. Civ. P. 15(a)(2) (“[A] party may amend its pleading only with the opposing party’s written consent or the court’s leave. The court should freely give leave when justice so requires.”). KV Load’s motion to strike is correct about that. But granting leave is within the Court’s discretion, and Rule 15(a)(2) instructs the Court to “freely give leave when justice so requires.” Like the plaintiffs, the Court does not perceive how the second amended complaint causes any undue delay, bad faith, dilatory motives, futility of amendments, or prejudice to the parties. See Lake v. Arnold, 232 F.3d 360, 373 (3d Cir. 2000).

 

KV Load argues that allowing another round of briefing would not move the ball forward. It points out the ways in which the second amended complaint failed to address the shortcomings identified in KV Load’s motion to dismiss the first amended complaint. If the Court grants leave to file the second amended complaint, then KV Load will simply rehash its Carmack preemption arguments in another motion to dismiss, and the parties “will be right back before the Court.” Resp. to Mot. Strike, at 2; see also Jablonski v. Pan Am. World Airways, Inc., 863 F.2d 289, 292 (3d Cir. 1988) (“[I]f the amendment will not cure [any] deficiency in the original complaint or if the amended complaint cannot withstand a motion to dismiss”).

 

The second amended complaint certainly leaves some issues unresolved — Carmack Amendment preemption chief among them, as addressed below. But it also resolves many ancillary issues. For instance, the plaintiffs have dropped their punitive damages claim. They have specified the consequential damages flowing from Mr. Krauss’s accident. And at oral argument, counsel for the plaintiffs conceded that the count for breach of contract is not directed at KV Load, despite the second amended complaint’s casual wording.

 

KV Load argues that the Carmack Amendment preemption question is ripe for review and will resolve almost all of the claims against KV Load. Because the Carmack preemption question has indeed been fully briefed, the Court will construe the Carmack arguments to apply to the state-law claims in the second amended complaint.

 

 

1. Carmack Preemption

The only remaining major dispute between KV Load and the plaintiffs is the issue of Carmack Amendment preemption. This question has already been well ventilated in the parties’ briefings. Accordingly, the Court will construe the parties’ arguments about Carmack preemption as to the first amended complaint to apply to the second amended complaint as well.

 

 

1. Standard of Review

A Rule 12(b)(6) motion to dismiss tests the sufficiency of a complaint. To survive a motion to dismiss, the plaintiff must plead “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Specifically, “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The question is not whether the claimant “will ultimately prevail…but whether his complaint [is] sufficient to cross the federal court’s threshold.” Skinner v. Switzer, 562 U.S. 521, 530 (2011) (citation and internal quotation marks omitted).

 

In evaluating the sufficiency of a complaint, the Court adheres to certain well-recognized parameters. For one, the Court “must consider only those facts alleged in the complaint and accept all of the allegations as true.” ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994). Also, the Court must accept as true all reasonable inferences emanating from the allegations, and view those facts and inferences in the light most favorable to the nonmoving party. See Revell v. Port Auth., 598 F.3d 128, 134 (3d Cir. 2010).

 

*4 That admonition does not demand that the Court ignore or even discount reality. “[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Ashcroft, 556 U.S. at 678. If a claim “is vulnerable to 12(b)(6) dismissal, a district court must permit a curative amendment, unless an amendment would be inequitable or futile.” Phillips v. County of Allegheny, 515 F.3d 224, 236 (3d Cir. 2008).

 

 

2. Background on Carmack Preemption

The Carmack Amendment to the Interstate Commerce Commission Termination Act provides:

A carrier providing transportation or service…shall issue a receipt or bill of lading for property it receives for transportation under this part. That carrier and any other carrier that delivers the property…are liable to the person entitled to recover under the receipt or bill of lading. The liability imposed under this paragraph is for the actual loss or injury to the property caused by (A) the receiving carrier, (B) the delivering carrier, or (C) another carrier over whose line or route the property is transported….

49 U.S.C. § 14706(a)(1) (emphasis added). In other words, a motor carrier is liable for damage or loss to cargo, and the liability is the actual loss or injury to the property.

 

The purpose of the Carmack Amendment was national uniformity in the liability assigned to interstate carriers. In the bad old days, carriers were “subjected to such a diversity of legislative and judicial holding that it was practically impossible for a shipper engaged in a business that extended beyond the confines of his own state…to know, without considerable investigation and trouble, and even then oftentimes with but little certainty, what would be the carrier’s actual responsibility as to goods delivered to it for transportation from one state to another.”  Adams Express Co. v. Croninger, 226 U.S. 491, 505 (1913).

 

Faced with this problem, Congress “struck a compromise between shippers and carriers.” Certain Underwriters at Interest at Lloyd’s of London v. UPS of Am., Inc., 762 F.3d 332, 335 (3d Cir. 2014). Carriers became “strictly liable for damage to or loss of goods.” Id. In return, Congress instituted a “uniform, nationwide scheme of liability, with damages limited to actual loss.” Id. “Now, under the Carmack Amendment, both parties know what to expect when a carrier damages a shipper’s goods.” Hubbard v. All States Relocation Serv. Inc., 114 F. Supp. 2d 1374, 1378 (S.D. Fla. 2000).

 

The Carmack Amendment achieves uniformity and predictability by preempting state laws related to carrier liability. Among other activity, the Amendment covers “services relating to [the movement of property], including arranging for, receipt, delivery, elevation, transfer in transit,…storage, handling, packing, [and] unpacking.” 49 U.S.C. § 13102(23)(B). Over one hundred years ago, the Supreme Court recognized that the Amendment regulates the details of interstate carrier liability “so completely that there can be no rational doubt that Congress intended to take possession of the subject, and supersede all state regulation with reference to it.” Adams Express, 226 U.S. at 505–06. Ever since, courts have consistently held that the Carmack Amendment preempts state law claims for damage to interstate shipments, such as negligence, breach of contract, and state consumer protection laws. See, e.g., Lewis v. Atlas Van Lines, 542 F.3d 403, 407–08 (3d Cir. 2008).

 

 

3. Limits of Carmack Preemption

*5 This case presents a fact pattern located on the very edge of the preemption mosaic. After all, the plaintiffs’ state law claims against KV Load are not for damage to the cargo. If they were (indeed, as they were in the initial complaint), then this would be an open-and-shut case of preemption. Instead, the plaintiffs’ state law claims against KV Load allege personal injuries to Mr. Krauss (and the downstream economic effects of those injuries). Nevertheless, are these claims also preempted by the Carmack Amendment?

 

The Circuits’ Courts of Appeals appear to be split on how to analyze the effect of the Carmack Amendment on a personal injury claim arising out of an interstate shipment. Several courts follow the “conduct” theory of Carmack preemption. Under this theory, the only claims that escape preemption are those “based on conduct separate and distinct from the delivery, loss of, or damage to goods.” Smith v. United Parcel Serv., 296 F.3d 1244, 1248–49 (11th Cir. 2002) (emphasis added).

 

Other courts follow the “harm” theory of preemption. According to these courts, a personal injury claim is not preempted when the plaintiff alleges “separate and independently actionable harms that are distinct from the loss of, or the damage to, the goods.” Gordon v. United Van Lines, Inc., 130 F.3d 282, 289 (7th Cir. 1997) (emphasis added); see also Rini v. United Van Lines, Inc., 104 F.3d 502, 506 (1st Cir. 1997) (“[A] claim for intentional infliction of emotional distress alleges a harm…that is independent from the loss or damage to goods and …would not be preempted.”) (emphasis added).1

 

Though the parties do not use the terms “conduct” and “harm” theories, they argue from these basic positions. Channeling the harm theory, the plaintiffs argue that Mr. Krauss’s claims are not preempted because they are for personal injuries to Mr. Krauss — claims “separate and distinct from the loss of, or damage to, goods.” Resp. to Mot. Dismiss, at 5. KV Load counters by arguing that the Carmack Amendment covers all of its conduct: “The Carmack Amendment applies to all harms caused while the goods were under the shipper’s control.” Mot. Dismiss, at 5. In other words, because the accident “happened during delivery of the Lego boxes,” the state law claims are preempted. Reply in Support Mot. Dismiss, at 6.

 

No surprise, then, that the Court’s decision as to the correct theory determines whether the Carmack Amendment preempts Mr. Krauss’s state-law claims. Under the conduct theory, the claims are preempted. KV Load’s conduct that injured Mr. Krauss — carelessly loading the pallets, carelessly leaving a double-stacked pallet dangling off the edge of the trailer — was part and parcel with its conduct that damaged the Legos. Every step of the way, KV Load’s conduct was covered by the Carmack Amendment. Plaintiffs’ counsel admitted as much at oral argument.

 

Under the harm theory, on the other hand, Mr. Krauss’s injuries are separate and distinct from the damage to the Legos. He seeks recompense for his physical and emotional injuries, not for damage the Legos. According to the harm theory, Mr. Krauss’s claims would survive preemption.

 

Guidance from the Third Circuit Court of Appeals on this question has been sparse. The Court of Appeals’ most recent pronouncement came in a footnote in 2014:

Courts of Appeals have identified a peripheral set of state and common law causes of action that are not preempted by the Carmack Amendment. See, e.g.,… White v. Mayflower Transit, L.L.C., 543 F.3d 581, 585–86 (9th Cir. 2008) (holding that claims based on conduct apart from the delay, loss, or damage to shipped property would not be preempted); Gordon, 130 F.3d at 289 (holding that claims based on harms apart from the delay, loss, or damage to shipped property are not preempted). The claims that the Underwriters bring [here] do not fall within this set. They seek only to recover for the loss of their goods — claims that lie at the heart of Carmack preemption.

*6 Certain Underwriters, 762 F.3d at 336 n.4 (emphasis in original). In other words, the court recognized the conduct/harm split, but it did not endorse either approach.2

 

 

4. The Case for the Conduct Theory

The Court adopts the conduct theory and rules that the state law claims against KV Load are preempted. This conclusion is bolstered by (1) the text of the Carmack Amendment, (2) the capacious language in early Supreme Court cases interpreting the Amendment, (3) the underlying purposes of the Amendment, and (4) consistent rulings by district courts within the Third Circuit.

 

First, by its own terms, the Amendment regulates services such as “arranging for, receipt, delivery, elevation, transfer in transit…storage, handling, packing, [and] unpacking” of cargo. 49 U.S.C. § 13102(23)(B). In other words, the statute governs the conduct that goes into moving goods from one state to another.

 

Second, the Supreme Court has held that the Carmack Amendment is “comprehensive enough to embrace all damages resulting from any failure to discharge a carrier’s duty with respect to any part of the transportation to the agreed destination.” New York, Phila. & Norfolk R.R. Co. v. Peninsula Produce Exch. of Md., 240 U.S. 34, 38 (1916) (emphasis added). Although this language is over a century old, it is not a dead letter; the Ninth Circuit Court of Appeals recently concluded that “a rule focusing on harm to the exclusion of conduct would contradict” this expansive Supreme Court statement. See White, 543 F.3d at 585–86.

 

Third, the conduct theory best advances the Carmack Amendment’s goals of national uniformity and predictability in carrier liability. For example, the Fifth Circuit Court of Appeals explained that allowing claims for negligent and intentional infliction of emotional distress “could only lead to the morass [of state law claims] that existed before the Carmack Amendment.” Moffit v. Bekins Van Lines Co., 6 F.3d 305, 307 (5th Cir. 1993).

 

Fourth, at least three district courts within the Third Circuit have either applied the conduct theory or issued rulings consistent with it. In Mallory v. Allied Van Lines, Inc., No. 02-cv-7800, 2003 WL 22391296 (E.D. Pa. Oct. 20, 2003), the plaintiff sued a carrier for emotional distress after the carrier lost the plaintiff’s Gucci sunglasses. Id. at *1. The court held that the claim was preempted because the plaintiff did not allege that the carrier “engaged in conduct…sufficiently distinct from the contract of carriage.” Id. at *4 (quoting Gordon, 130 F.3d at 290) (emphasis added). The emotional injury claim arose “solely from the loss of her goods.” Id. Thus, Mallory seems to have applied the conduct theory.

 

In the next case, Jones v. USA Express Moving, No. 08-cv-0880 (E.D. Pa. June 27, 2008), a woman hired a moving company to move her belongings into her new home. The moving company refused to unload the belongings until it was paid. This standoff lasted for 8 months, when the woman sued the moving company for breach of contract and conversion.

 

*7 Judge Brody held that the woman’s claims were preempted. She explained that intentional torts that are “inextricably intertwined” with an underlying property loss are preempted. Id. at 6. She emphasized that “[t]he principle underlying this broad preemption is predictability.” Id. at 3. Though she also stated that “applicability of the Carmack Amendment is determined solely by reference to the harm caused while the goods were under the shipper’s control,” id. at 5 (emphasis added), that statement was meant to distinguish a rule that focused on the carrier’s state of mind — not on the carrier’s conduct.

 

To be fair, Jones could be shoehorned into either theory. The “inextricably intertwined” language is consistent with conduct theory cases. But even under the harm theory, the court reached the correct conclusion. After all, the plaintiff alleged only harms to property (breach of contract and conversion), not personal injury.

 

Finally, looking outside this district, a case from the Middle District of Pennsylvania that appears to have applied the conduct theory. In Strike v. Atlas Van Lines, Inc., 102 F. Supp. 2d 599 (M.D. Pa. 2000), gasoline spilled onto the plaintiff’s property during shipment. Upon delivery, the fumes overwhelmed the plaintiff, who required medical attention, and who eventually sued the carrier for a personal-injury negligence claim. The court held that the Carmack Amendment preempted the personal injury claim because the plaintiff’s injuries were “suffered as the result of changes made to shipped goods through negligence of the carrier.” Id.at 600. In other words, the same carrier conduct that damaged the cargo injured the plaintiff.3

 

 

5. Carmack Conclusion

In this case, KV Load’s conduct was allegedly substandard: The cargo was loaded improperly, damaged in transit, and damaged during the unloading process. KV Load’s conduct that damaged the cargo completely becomes the conduct that injured Mr. Krauss. The state law claims against KV Load are therefore dismissed as preempted.4

 

 

1. Ancillary Arguments

KV Load raised two arguments in its briefing that it withdrew at oral argument.

 

First, KV Load had argued that the economic loss doctrine bars the plaintiffs’ breach of contract claim against KV Load. At oral argument, plaintiffs’ counsel conceded that plaintiffs had no breach of contract claim against KV Load. This argument is therefore moot as abandoned.

 

*8 Second, KV Load had argued that the plaintiffs had waited too long to KV Load’s motion to dismiss. At oral argument, however, counsel for KV Load withdrew this argument.

 

 

1. Remaining Issues in a Third Amended Complaint

The litigation will be best served if plaintiffs file a third amended complaint to clarify the counts against KV Load in light of this opinion and accompanying order. Specifically:

1. Count 1 of the second amended complaint (negligence against IRIS and C.H. Robinson) remains unchanged by this ruling.
2. Count 2 of the second amended complaint (negligent infliction of emotional distress against all defendants) now omits KV Load.
3. Count 3 of the second amended complaint (breach of contract against IRIS and C.H. Robinson) now omits KV Load.
4. Count 4 of the second amended complaint (Carmack Amendment claim against KV Load) remains unchanged by this ruling.
5. Count 5 of the second amended complaint (negligence against KV Load) has been entirely dismissed.

 

 

CONCLUSION

For the foregoing reasons, the Court grants the plaintiffs’ motion for leave to file the second amended complaint and dismisses as moot defendant KV Load’s motion to strike the second amended complaint.

 

The Court construes the arguments about Carmack Amendment preemption in defendant KV Load’s motion to dismiss the first amended complaint to apply to the second amended complaint, and the Court grants KV Load’s motion to dismiss.

 

An appropriate order follows.

BY THE COURT:

 

 

/s/ Gene E.K. Pratter

GENE E.K. PRATTER

UNITED STATES DISTRICT JUDGE

All Citations

Slip Copy, 2017 WL 5624951

 

 

Footnotes

1

For a thorough discussion of the two theories, see White v. Mayflower Transit, L.L.C., 543 F.3d 581, 585–86 (9th Cir. 2008).

2

At oral argument, both sides tried to claim Certain Underwriters as an ally. But in the war between the conduct theory and the harm theory, Certain Underwriters is determinedly Swiss.

3

The plaintiffs rely on a Wisconsin case with almost identical facts to those presented here. In McGinn v. JB Hunt Transport, the plaintiff was injured when goods that had been improperly loaded into a trailer fell out of the trailer onto the plaintiff. The court held that the plaintiff’s state-law claims were not preempted on the ground that the injury was “separate and distinct from the loss of, or damage to, goods that were shipped in interstate commerce,” even though the injury had “some association with the transfer of goods.” McGinn v. JB Hunt Transp., Inc., No. 10-cv-610, 2012 WL 124401, at *3 (E.D. Wis., Jan. 17, 2012) (quoting Gordon, 130 F.3d at 289). However, McGinn was controlled by a Seventh Circuit Court of Appeals case that had already adopted the harm theory. See Gordon v. United Van Lines, Inc., 130 F.3d 282, 289 (7th Cir. 1997). This circuit, on the other hand, has seen no such binding pronouncement.

4

The Court notes that even though Mr. Krauss’s state-law claims against KV Load are preempted, his claims against the other defendants survive. See Second Am. Compl. ¶ 85 (“Defendants IRIS and C.H. Robinson’s breach of these duties were the direct and proximate cause of the severe physical injuries and emotional distress suffered by Mr. Krauss, as discussed herein, which were reasonably foreseeable.”).

United States District Court,

1. New Mexico.

SPIRIT COMMERCIAL AUTO RISK RETENTION GROUP, Plaintiff,

v.

GNB TRUCKING, INC., ERIC HEIN, WENDY HEIN, and LEE HUNT as Personal Representative of the Estate of RILEY HEIN, Defendants.

Case No. 1:17-cv-00842 WJ/SCY

|

Filed 11/14/2017

 

 

MEMORANDUM OPINION AND ORDER DISMISSING CASE WITHOUT PREJUDICE BASED ON BRILLHART ABSTENTION DOCTRINE

*1 THIS MATTER comes before the Court upon a Motion to Dismiss Complaint for Declaratory Judgment Pursuant to the Brillhart Abstention Doctrine or, Alternatively to Stay While Underlying State Action is Proceeding, filed on September 29, 2017 by Defendants Eric Hein, Wendy Hein, and Lee Hunt as personal representative of the Estate of Riley Hein (collectively, the “Heins”) (Doc. 4). Having reviewed the parties’ pleadings and the applicable law, the Court finds that Defendants’ motion is well-taken and, therefore, is granted in that this case shall be dismissed without prejudice.

 

 

BACKGROUND

This is an insurance coverage dispute. In November 2015, GNB Trucking, Inc. (“GNB Trucking” or “GNB”) was hired by a property broker, Choptank Transport, Inc., to transport a load of frozen bread from Muncie, Indiana to Compton, California with a drop-off date of November 14, 2015. Despite being hired as the carrier, GNB did not transport the load itself, but instead hired Barkandhi Express, Inc., a motor carrier alleged to be unsafe, pursuant to a “sub hauler” contract that had been executed in October 2015. While traveling through New Mexico, the Barkandhi truck hired by GNB collided with a car driven by the Heins’ 16 year-old son Riley, causing his death. The Barkandhi Express semi-truck involved in the crash is not listed on GNB Trucking’s insurance policy issued by Spirit. In this federal action, Spirit seeks a declaration that it owes no duty to GNB Trucking, the Heins or any other person or entity for claims arising out of the underlying action.

 

An underlying wrongful death case is currently proceeding in state court. The state action was filed in the First Judicial District, County of Santa Fe on November 18, 2016. As plaintiffs in that action, the Heins sued GNB Trucking and the New Mexico Department of Transportation in a wrongful death action. See Hein et al. v. The New Mexico Dep’t of Transportation, et al., No. D-101-CV-2016-01541; see Doc. 1-1 (Am. Compl.) & Doc. 10-1 (Sec. Am. Compl.).

 

 

DISCUSSION

The Heins filed the instant motion seeking a dismissal—or in the alternative, a stay—of these federal proceedings. They claim that the controversy regarding coverage should be heard in the pending state case under New Mexico’s Declaratory Judgment Act because nothing can be decided in this federal lawsuit until the issues in the underlying state case are decided. See Doc. 4, n.1).1 Plaintiff, the insurer in this case, contends that this coverage action involves different issues than those that are in the underlying state court wrongful death suit and so the request to dismiss or stay this federal action should be denied.

 

 

1. Relevant Law

*2 The Declaratory Judgment Act vests federal courts with power and competence to issue a declaration of rights. 28 U.S.C. § 2201. While this statute vests the federal courts with power and competence to issue a declaration of rights, see Public Affairs Assocs., Inc. v. Rickover, 369 U.S. 111, 112, (1962) (per curiam), the question of whether this power should be exercised in a particular case is vested in the sound discretion of the district courts. St. Paul Fire and Marine Ins. Co. v. Runyon, 53 F.3d 1167, 1168 (10th Cir. 1995). In Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942), the United States Supreme Court made it clear that district courts are “under no compulsion to exercise … jurisdiction” under the Declaratory Judgment Act, noting that “it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in a state court presenting the same issues, not governed by federal law, between the same parties.” Id. at 494. Instead, the district court should determine whether the lawsuit “can better be settled in the proceeding pending in the state court.” Id. This question involves a consideration of whether the matters being heard in the state court action are essential to a determination of the collateral federal action, or whether the issue being raised in the federal declaratory action involves no matter—factual or legal—at issue in the state case. In other words, this Court must consider whether the questions in controversy between the parties to this federal lawsuit “can better be settled in the proceeding pending in the state court.” Brillhart, 316 U.S. at 494; see also Wilton v. Seven Falls Co., 515 U.S. 277, 283 (1995) (framing question as “whether the claims of all parties in interest can satisfactorily be adjudicated in [the state court] proceeding”) (quoting Brillhart, 316 U.S. at 495).

 

In deciding whether or not to hear a declaratory judgment action, a court considers various factors, including these:

(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.

St. Paul Fire and Marine Ins. Co. v. Runyon, 53 F.3d 1167, 1169 (10th Cir. 1995) (citing State Farm Fire & Casualty Co. v. Mhoon, 31 F.3d 979, 983 (10th Cir.1994)).

 

 

1. Facts Relating to Policy at Issue

The Heins claim that this federal action should be dismissed or at least stayed because nothing can be decided in this separate federal lawsuit until the underlying issues in the state case are decided. They acknowledge that the Barkandhi Express semi-truck that was involved in the November 13, 2015 crash was not listed on the policy issued to GNB Trucking by Spirit, but contend that the truck may still be insured under the following section of the policy:

Tabular or graphical material not displayable at this time.

Ex. 1, Spirit Policy, Motor Carrier Coverage Form, p. 3.

 

The Heins contend that whether or not this policy applies to their claims against GNB Trucking depends on a factual determination about the reasons GNB hired another motor carrier to transport the load of goods in its place. The Heins also characterize the claims against GNB as arising from the use of motor vehicles subject to the financial responsibility requirements of Sections 29 and 30 of the Motor Carrier Act of 1980, and for this reason they argue that the claims may be covered under an endorsement in the policy which applies to:

public liability resulting from negligence in the operation, maintenance or use of motor vehicles subject to the financial responsibility requirements of Sections 29 and 30 of the Motor Carrier Act of 1980 regardless of whether or not each motor vehicle is specifically described in the policy and whether or not such negligence occurs on any route or in any territory authorized to be served by the insured or elsewhere.

Ex. 1, SIC policy, MCS-90 endorsement, p. 2 (“Form MCS-90”). The Heins note that GNB Trucking has failed to respond to written discovery requests seeking information about the reasons it hired another motor carrier in the first place. See Exs. 3, 4, & 5.

 

 

III. Analysis of Mhoon Factors

*3 The Heins argue that the Mhoon factors weigh in favor of dismissal or at least a stay of the federal action. Plaintiff gives barely a passing nod to those factors, choosing instead to narrow the sole question to whether or not the same coverage dispute is before the state court, and arguing that the Court should deny dismissal when the coverage claims are presented only in the federal action. However, there is no case law supporting Plaintiff’s suggestion that such an approach is sufficient. Plaintiff relies on several unpublished cases which did not actually adopt the very narrow analysis Plaintiff urges this Court to espouse here, but instead embarked on an analysis of the Mhoon factors. See Doc. 8 at 7-8 & n.2. While there is no requirement to follow a formulaic approach in discussing the Mhoon factors, there should be some adherence to its framework. The Mhoon factors can be conveniently grouped into a consideration of (a) the first and second factors; (b) the third factor; and (c) the fourth and fifth factors.

 

 

1. First and Second Mhoon Factors.

The first two factors are (1) whether a declaratory action would settle the controversy; and (2) whether it would serve a useful purpose in clarifying the legal relations at issue.

 

Spirit, the insurer and Plaintiff in this federal action, argues that there is no coverage dispute in the underlying state action because the complaint in that venue alleges claims of negligent and intentional acts against GNB Trucking, the named insured under a policy issued by Spirit. Plaintiff also maintains that none of the facts at issue in the state court action are necessary to the resolution of the underlying tort suit.

 

The Heins assert that a key issue in the underlying case is GNB’s decision to hire another motor carrier instead of transporting the load itself. See Ex. 1 (Sec. Am. Compl., ¶¶54-57). They contend that the reason GNB hired Barkandhi Express is highly relevant to several issues, including whether GNB Trucking breached its duty to the traveling public as a motor carrier and its violation of federal law in acting as a broker without a license; as well as the issue of motive—which in turn may be key to determining whether GNB’s conduct meets the threshold for punitive damages. For example, if GNB hired Barkandhi Express as a “temporary substitute” for a vehicle covered under GNB’s policy issued by Spirit, then the policy will afford coverage as a matter of law. See Doc. 4-2, p. 3 (provision on coverage for “Temporary Substitute Autos”). The Heins contend that the coverage issue under the “temporary substitute autos” provision must be determined before the Court can proceed to the next question: whether the Form MCS-90 endorsement provision applies, since it applies only if GNB is not covered by the temporary replacement provision. They argue that the facts underlying these issues are already being explored as part of the state court proceeding, although still in the discovery stages.

 

Plaintiff likens this case to the Mhoon case, where the court declined to stay the federal declaratory action while the state court case continued. This Court, however, finds that Mhoon is more of a contrast to the instant case than a comparison. Mhoon arose out of a dispute between neighbors which resulted in Mr. Mhoon shooting Mr. Fujiwara. Mhoon was convicted of aggravated battery in a criminal proceeding, and while that action was pending Fujiwara and his wife sued Mhoon in a civil action in state court. Mhoon was covered under a State Farm homeowner’s policy only for accidental, not intentional harms that he might commit. 31 F.3d at 982. Ruling in favor of the insurer on the insurer’s summary judgment motion, the federal district court easily found that there was no triable issue with respect to whether Mhoon’s conduct could be termed accidental under the policy: while the complaint alleged that Mhoon’s actions were accidental, the court found that it offered “no facts whatsoever that suggest this was the case.” Id. at 984-985. Other evidence, including Mhoon’s own testimony, precluded any serious suggestion that he accidentally shot his neighbor and the court further noted that the issue had also been resolved by the application of collateral estoppel in the criminal case.

 

*4 The court in Mhoon found that addressing these issues involved no “undue interference” with the state proceeding because there was no material dispute that needed to be settled on either the duty to defend or the coverage issue:

The duty to defend issue, as will be explained below, involved only an examination of the state court complaint to see if its allegations of fact triggered the duty. Determining that duty involved no matter, factual or legal, at issue in the state case. Nor was the coverage issue, under the trial court’s approach, a complicated one: it involved only a search of the relevant record to ascertain whether there was any triable issue with respect to whether Mhoon’s conduct could be termed accidental under the terms of the homeowner policy. Any ambiguities, moreover, had to be resolved in appellant’s favor. It is very doubtful that this approach and the summary judgment threatened any substantial interference in the state court proceedings.

Mhoon, 31 F.3d at 984. Plaintiff in this case ignores that there are factual matters relating to key issues for coverage that are being developed in the state court, whereas in Mhoon, the state court was not expected to make any further findings that were necessary to resolve the coverage issue.

 

The facts in the Runyon case are in stark contrast to those in Mhoon. In Runyon, the Tenth Circuit affirmed the district court’s decision to decline the exercise of jurisdiction, applying the Mhoon factors. 53 F.3d 1167. Runyon, a nurse anesthetist, was sued by two coworkers who alleged, inter alia, that Runyon abused patients and withheld medically necessary services to patients because they either lacked insurance or because of their race. Runyon’s malpractice carrier declined to provide a defense, asserting that the coworkers’ lawsuit did not implicate professional liability coverage, and when the insurer filed a declaratory judgment action in federal court, Runyon filed a bad faith and breach of contract suit against the carrier in state court the following day. The Tenth Circuit observed that the core question in both cases was the same—whether the insured was protected from liability in a separate court action under his insurance contract, and agreed with the district court that both the insured and the insurer were parties to the pending state contract action, and that the federal action involved the identical issue. 53 F.3d at 1169.

 

Plaintiff characterizes Runyon as distinguishable from this case because disputes over coverage were at issue in both the state and federal lawsuit in Runyon, where in the instant case disputes over coverage are presented only in the federal action. However, while Spirit is not a party in the underlying state action and coverage is not an asserted or prominent claim in the underlying case, nevertheless fact-dependent issues relating to coverage will most likely be decided in the pending state court proceeding. See Kunkel v. Cont’l Cas. Co., 866 F.2d 1269, 1276 (10th Cir. 1989) (“a district court ‘should not entertain a declaratory judgment action over which it has jurisdiction if the fact-dependent issues are likely to be decided in another pending proceeding’ ”).

 

One of the unpublished cases relied on by Plaintiff was before the undersigned where the Court denied a motion to abstain from exercising jurisdiction over the federal declaratory action. In that case, Those Certain Underwriters at Lloyd’s London Subscribing Policy No. C111271/054 v. New Mexico Psychiatric Servs. Corp., plaintiff Shaw filed a complaint in state court against New Mexico Psychiatric Services (“NMPS”), the Board of Commissioners of Chaves County, New Mexico and several individual defendants, alleging counts of negligence and loss of consortium relating to the death of her husband while he was jailed at the county’s detention center. NMPS was under contract to provide medical care at that facility. No. CV 14-00178 WJ/CG, 2015 WL 11622957, at *3 (D.N.M. Feb. 11, 2015). NMPS’ insurer sought a declaration in federal court of the rights and obligations of the parties under the policy with respect to the state court lawsuit instituted by the deceased’s wife. The county was not an additional named insured under the policy, nor was the insurer a party to any relevant agreement between NMPS and the county. This Court engaged in an analysis under the Mhoon factors and concluded that the issue of coverage and the insurer’s obligations to NMPS and/or the county in the federal lawsuit would not have any impact on the dispute between plaintiff and the county in the underlying state court action. Id. at *2. The parties could obtain complete relief in the federal action despite the absence of Chaves County as a party and so the federal action could proceed without encroaching on the state court’s jurisdiction to resolve the underlying issues.

 

*5 The Court’s conclusion in Those Certain Underwriters was based on a consideration of the Mhoon factors, and in that case there was a very real disconnect between the coverage issue in the federal action and the tort action in the state court case. The circumstances are not the same in the instant case, where facts relating to coverage will necessarily be developed and addressed in the state court litigation as the case proceeds. It would make little sense in terms of both efficiency and comity to adjudicate those same factual issues here.

 

The first two Mhoon factors weigh strongly in favor of abstention.

 

 

1. Third Mhoon Factor: Procedural Fencing

The third factor concerns 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.”

 

The Heins point out that Spirit filed this declaratory action nine months after the state court claims were brought against GNB, and only after a mediation that failed to resolve the case. Cmp. Runyon, 53 F.3d at 1170 (affirming finding of procedural fencing by district court where insurer filed its federal suit one day before the date the insured promised to file his state court contract action against insurer). Also, Spirit is not a party to the state court action even though it has participated in mediation and has tendered a defense on behalf of GNB Trucking and while Spirit could have intervened to resolve the coverage issue in the state court case, it chose not to do so.

 

Plaintiff offers no counter to the Heins’ arguments on this factor. The Mhoon court based its decision to retain the case in part on the fact that neither party had suggested the insurer “was, or could have been made, a party to the state tort action, thus obviating any need for an independent declaratory action and providing a simpler and more efficient resolution of [the insurer’s] obligations toward Mhoon.” Id. at 984. Here, there is no dispute that Spirit can be made a party to the state tort action—which would also obviate any need for an independent declaratory action and providing a more streamlined resolution of Spirit’s obligations toward GNB, its insured, as well as the Heins. See Addison Ins. Co. v. Rippy, 2009 WL 723322, at *7 (D. Colo. Mar. 18, 2009) (“The discussion that tends to dominate the analysis of the fifth Mhoon factor focuses on whether the parties could adjudicate the issue in the underlying action.”) (citing U.S. v. City of Las Cruces, 289 F.3d 1170, 1188–89 (10th Cir.2002) and Mhoon, 31 F.3d at 984).

 

Without any responsive argument from Plaintiff on the procedural fencing question, this third factor weighs in favor of a finding that Spirit filed this action because it viewed federal court as a more favorable forum and thus is using this action for procedural fencing. See St. Paul Fire & Marine Ins. Co. v. Runyon, 53 F.3d 1167, 1170 (10th Cir. 1995) (district court may choose to avoid a declaratory judgment action because the plaintiff is using the action for procedural fencing).

 

 

1. Fourth and Fifth Mhoon Factors

The final factors in the analysis consider whether use of a declaratory action would increase friction between federal and state courts and improperly encroach upon state jurisdiction; and whether there is an alternative remedy which is better or more effective.

 

The Heins contend that the appropriate forum for factual questions underlying coverage is the underlying state case. See Lopez v. New Mexico Pub. Sch. Ins. Auth., 1994-NMSC-017, ¶ 11, 117 N.M. 207, 210, 870 P.2d 745, 748 (“Generally, a determination of whether an exclusion relieves an insurer from a duty to defend must be made in the primary lawsuit, and not in an action for declaratory judgment, because it is a factual question.”). The Court agrees and finds that addressing these facts here as well would encroach on state jurisdiction. While the state court claims are premised on a wrongful death action, inevitably the state court case will open up an investigation into certain facts relating to the reasons behind GNB’s decision to hire out another motor carrier to transport the load of goods in its place, and that findings will be made based on the investigation of that issue.

 

*6 Because the state court case will be addressing these matters, the state court provides a forum that is at least equivalent to that offered by allowing the action to proceed in federal court. Moreover, this Court considers the state court forum to be efficient at this point since discovery is already underway there. The state court action (particularly with joinder of Spirit pursuant New Mexico’s Declaratory Judgment Act) would decide the rights of all interested parties and would therefore be more comprehensive and efficient. See Ortiz v. Biscanin, 190 F. Supp. 2d 1237, 1247 (D. Kan. 2002) (noting that the state declaratory judgment act empowers courts to determine the rights and liabilities of the parties in litigation at bar). Plaintiff provides no reason for this Court to find that the New Mexico state court would provide “less complete relief than that which is available in federal court.” Id. at 1247 (concluding that proceeding with federal declaratory action would be improper under Tenth Circuit standards).

 

Plaintiff offers no specific response as to these last two factors. Instead, Spirit points out that the federal action will be governed by different substantive law than the underlying lawsuit: the claims in the underlying tort suit between the Heins and GNB will be controlled by New Mexico substantive law (location of the accident) but the coverage issues in the federal action will be governed by contract law. See Doc. 8 at 3-4.2 However, this argument is not a valid reason to proceed with the federal action. As the Heins observe, a New Mexico state court has the authority to interpret a contract by applying another state’s law—just as a New Mexico federal court does. See Nez v. Forney, 1989-NMSC-074, 109 N.M. 161, 783 P.2d 471 (court may apply forum state’s statute of limitations even if another state’s substantive law is to be applied); Burge v. Mid-Continent Cas. Co., 1997-NMSC-009, 123 N.M. 1, 933 P.2d 210 (choice of law provision in an automobile policy called for application for Oklahoma law by New Mexico state court with respect to substantive issues).

 

The final Mhoon factors favor abstention. Resolution of fact-dependent issues in state court will also determine the coverage issues that are before the court here. Comity and efficiency both require that the federal court not get in the way of the New Mexico state court in examining those issues and resolving those facts.

 

 

1. Whether Dismissal or a Stay is Appropriate

The last question is whether dismissal or a stay of the federal action is appropriate in these circumstances. As mentioned previously, while pendency of an action in state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction, neither is the federal court obliged to proceed with a case where the controversy may be resolved more expeditiously in the state court. State Farm Mut. Auto. Ins. Co. v. Scholes, 601 F.2d 1151, 1154 (10th Cir. 1979) (citing Brillhart v. Excess Ins. Co., 316 U.S. 491, 494 (1942)). The United States Supreme Court has also voiced strong support for a district court’s discretion to defer proceedings because of concurrent state litigation:

No one can seriously contend that a busy federal trial judge, confronted both with competing demands on his time from matters properly within his jurisdiction and with inevitable scheduling difficulties because of the unavailability of lawyers, parties, and witnesses, is not entrusted with a wide latitude in setting his own calendar.

Will v. Calvert Fire Ins. Co., 437 U.S. 655, 665 (1978) (Opinion of Rehnquist, J.) (citing Scholes, 601 F.2d at 1155. In Scholes, the Tenth Circuit found the opinion by the Utah district court to be instructive:

Wise judicial administration militates against State Farm’s contention that both this action and the state court action should proceed simultaneously. Simultaneous prosecution of both causes would result in wasteful duplication of efforts of counsel, courts, litigants, and witnesses. Moreover, the state court obtained jurisdiction long before this court. No issue of federal law or policy is involved. A final judgment in state court will necessarily resolve all issues before this court and the other issues arising out of the same transactions thus allowing comprehensive disposition of litigation.

*7 Scholes, 601 F.2d at 1155 (denying a writ of mandamus where insurer’s federal declaratory action was dismissed and finding that insurer’s right to have its action heard because of the pendency of a state court proceeding was not clear and indisputable. State Farm Mut. Auto. Ins. Co. v. Scholes, 601 F.2d 1151 (10th Cir. 1979). In Scholes, the Tenth Circuit also considered other factors such as:

… comity, the extent of disputed factual (as opposed to legal) issues involved, adequacy of relief available in statute court, avoidance of maneuvers designed to throw sand into judicial machinery, the order in which the courts obtained jurisdiction, the need for comprehensive disposition of litigation, and the desirability of avoiding piecemeal litigation.

Scholes, 601 F.2d at 1155. All of these considerations are pertinent here as well, and there would be no good reason to stay the case instead of dismissing it. All of the factual issues relating to coverage can be addressed and resolved in the state court proceeding.

 

In sum, the Court agrees with the Heins that there can be no resolution of the current action until the factual question of why GNB hired Barkandhi has been answered, and that this and other factual resolutions being addressed in state court are relevant to the issue of coverage. There is no reason for this Court to take over an inquiry into factual issues that is already underway in the pending state court proceeding and thus, no reason for this federal action to continue.

 

THEREFORE, IT IS ORDERED that the Heins’ Motion to Dismiss Complaint for Declaratory Judgment Pursuant to the Brillhart Abstention Doctrine or, Alternatively to Stay While Underlying State Action is Proceeding (Doc. 4), is hereby GRANTED and that this case is DISMISSED WITHOUT PREJUDICE for the reasons stated in this Memorandum Opinion and Order.

 

A Rule 58 Judgment shall issue separately.

 

All Citations

Slip Copy, 2017 WL 5468670

 

 

Footnotes

1

Under New Mexico law, collateral actions for declaratory judgment on an insurer’s duty to defend are not allowed. A party wishing to exercise its rights under the state’s declaratory judgment statute, NMSA § 44-6-2, must file its action in the appropriate state proceeding that is already proceeding. See Lopez v. New Mexico Public Sch. Ins. Authority, 1994-NMSC-017, § 11, 870 P.2d 745.

2

Defendant GNB Trucking is a California corporation with its principal place of business in California, and Plaintiffs suggest that California law will apply rather than New Mexico law. Doc. 8 at 4.