Argonaut Ins. Co. v. St. Francis Med. Ctr., Corp.

17 F.4th 1276

ARGONAUT INSURANCE COMPANY, an Illinois Corporation, Plaintiff-Appellant,

v. ST. FRANCIS MEDICAL CENTER, a non-profit Hawaii Corporation, Defendant-Appellee,andJohn Does, 1–10; Jane Does, 1–10; Doe Corporations, 1–10; Doe Entities, 1–20, Defendants.

No. 19-17314

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 3, 2021 Honolulu, Hawaii

Filed November 16, 2021

Jeffrey J. Bouslog (argued) and Patrick M. Fenlon, Fox Rothschild LLP, Minneapolis, Minnesota; Alan Van Etten, Deeley King Pang & Van Etten, Honolulu, Hawaii; for Plaintiff-Appellant.

Jordon J. Kimura (argued) and David J. Minkin, McCorriston Miller Mukai MacKinnon LLP, Honolulu, Hawaii; Stephen F. English, Perkins Coie LLP, Portland, Oregon; for Defendant-Appellant.

Before: Richard R. Clifton, Ryan D. Nelson, and Daniel P. Collins, Circuit Judges.

R. NELSON, Circuit Judge

Ordinarily, a district court has discretion to decline jurisdiction over a declaratory-relief claim brought under 28 U.S.C. § 2201. But when a declaratory claim is joined with an "independent" monetary one, the district court, in most cases, must retain jurisdiction over the entire action. Gov't Emps. Ins. Co. v. Dizol , 133 F.3d 1220, 1225 & n.6 (9th Cir. 1998) (en banc). Argonaut Insurance Company sued St. Francis Medical Center ("SFMC") in federal court for declaratory relief. In response, SFMC filed an answer asking the district court to decline jurisdiction and counterclaimed for declaratory and monetary relief, but only if the district court first exercised jurisdiction over Argonaut's claims.

Because parties can plead a conditional counterclaim and still preserve objections to jurisdiction, we hold that such conditionally pled counterclaims, without more, do not trigger mandatory jurisdiction over declaratory claims. And because the district court properly exercised its discretion in deciding to dismiss, we affirm.

I

This insurance dispute stems from underlying litigation in Hawaii state court ("Hawaii litigation"). Former students sued Kamehameha Schools, alleging sexual abuse by a doctor from the late 1950s through the early 1980s. Because the doctor had practiced on SFMC's campus, Kamehameha Schools filed crossclaims against SFMC, which sent these crossclaims to its insurer, Argonaut, to defend and indemnify it. Argonaut initially denied coverage, concluding the Hawaii litigation was not covered by SFMC's policies, but ultimately agreed to represent SFMC subject to a reservation of rights.

Neither Argonaut nor SFMC could determine the terms and conditions of the relevant policies from decades earlier. Argonaut sought declaratory relief in federal court under 28 U.S.C. § 2201, as to (1) what policies Argonaut had issued to SFMC during the relevant period; (2) the terms and conditions of those policies; and (3) what rights and duties, if any, Argonaut owed SFMC.

In its answer, SFMC asserted a threshold affirmative defense that the district court should decline jurisdiction over Argonaut's declaratory claim, reasoning that jurisdiction over Argonaut's declaratory action was "inappropriate because the claim presents solely issues of state law during the pendency of parallel proceedings in state court." At the same time, it filed two counterclaims. The first mirrored Argonaut's declaratory requests. The second sought monetary relief and alleged Argonaut had breached its duty of good faith. SFMC asserted its counterclaims only "[i]f the Court asserts jurisdiction over Argonaut's declaratory relief claim." One month later, SFMC filed a separate motion again asking the district court to decline jurisdiction over Argonaut's declaratory claims and dismiss the case.

The district court granted SFMC's motion, holding that notwithstanding SFMC's monetary counterclaim, it had discretionary jurisdiction over Argonaut's declaratory claims and the relevant factors supported declining jurisdiction. Argonaut appealed.

II

Whether the district court has mandatory or discretionary jurisdiction over a declaratory claim is reviewed de novo. United Nat'l Ins. Co. v. R&D Latex Corp. , 242 F.3d 1102, 1112 (9th Cir. 2001). We review the district court's decision to decline jurisdiction over a declaratory claim for abuse of discretion. Wilton v. Seven Falls Co. , 515 U.S. 277, 289–90, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995) ; Dizol , 133 F.3d at 1223. We may affirm the district court's order declining jurisdiction on any ground supported by the record. See City of St. Paul v. Evans , 344 F.3d 1029, 1033 (9th Cir. 2003).

III

Under the Declaratory Judgment Act, "any court of the United States, upon the filing of an appropriate pleading, 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). This provision "confer[s] on federal courts unique and substantial discretion in deciding whether to declare the rights of litigants," even if the declaratory claim "otherwise satisfies subject matter jurisdictional prerequisites." Wilton , 515 U.S. at 282, 286, 115 S.Ct. 2137. In other words, a district court is "under no compulsion to exercise [its] jurisdiction" over declaratory claims. Brillhart v. Excess Ins. Co. of Am. , 316 U.S. 491, 494, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942) ; see also Dizol , 133 F.3d at 1223 ("The Act gave the federal courts competence to make a declaration of rights; it did not impose a duty to do so." (internal quotation marks and citation omitted)). So long as it reasonably considers the relevant factors from Brillhart and Dizol , "a district court is authorized" as a matter of discretion to "stay or to dismiss an action seeking a declaratory judgment." See Wilton , 515 U.S. at 288, 115 S.Ct. 2137 ; Dizol , 133 F.3d at 1223, 1225 & n.5.

Jurisdiction over a declaratory claim is not always discretionary, however: "when other claims [for monetary relief] are joined with an action for declaratory relief ... the district court should not, as a general rule, remand or decline to entertain the claim for declaratory relief." Dizol , 133 F.3d at 1225. If a monetary claim is "independent," district courts have a "virtually unflagging obligation to exercise jurisdiction over these claims." Id. at 1225 n.6 (internal quotation marks and citation omitted). A monetary claim is "independent" (and triggers mandatory jurisdiction) if it satisfies subject matter jurisdiction on its own and is not required to be brought with a declaratory claim. Id. ; United Nat'l Ins. , 242 F.3d at 1113. Take SFMC's bad faith monetary counterclaim as an example. The parties agree the bad faith counterclaim independently satisfies diversity jurisdiction,¹ and Hawaii law allows a plaintiff to file a bad faith claim without appending it to a declaratory claim. Given mandatory jurisdiction over the monetary claim, Dizol 's rule would ordinarily suggest retaining jurisdiction over the related declaratory action "to avoid piecemeal litigation." 133 F.3d at 1226.

IV

The question presented here is whether the mandatory jurisdiction rule applies when the defendant both asserts a threshold defense that the district court should decline jurisdiction under Brillhart and asserts a monetary counterclaim if the court retains jurisdiction. We hold that Dizol 's mandatory rule does not apply here.

A

Our conclusion is grounded in several Federal Rules of Civil Procedure. The Rules do not require that threshold defenses always be pled by motion. Rather, Rules 12(b) and 12(h) provide that a defendant must assert its defense, absent a pre-answer motion, in a responsive pleading if one is required and that it may choose to assert a defense by answer without risking forfeiture of that defense. See Fed. R. Civ. P. 12(h)(1)(B) (in absence of any "motion under this rule," a defense is waived by "failing to ... include it in a responsive pleading or in an amendment allowed by Rule 15(a)(1) as a matter of course"); see also Fahey v. O'Melveny & Myers , 200 F.2d 420, 451 n.9 (9th Cir. 1952) (it is "basic under Rule 12(b)" that a defense of personal jurisdiction "may be joined with a defense on the merits without any waiver resulting"). Here, SFMC asserted a threshold defense in its answer.

In addition, Rule 13 directs a defendant to assert compulsory and permissive counterclaims in its answer, and it follows that because the Rules allow threshold defenses (such as improper venue, personal jurisdiction, or, as here, improper declaratory jurisdiction) to be pled by answer, those defenses are preserved even if coupled with counterclaims. See Hillis v. Heineman , 626 F.3d 1014, 1018 (9th Cir. 2010) ("holding that the mere assertion of a counterclaim will not waive a defense of improper venue that was explicitly asserted in an answer filed contemporaneously with the counterclaim"); Gates Learjet Corp. v. Jensen , 743 F.2d 1325, 1330 n.1 (9th Cir. 1984) ("[W]e hold that the filing of a permissive counterclaim does not constitute a waiver of a personal jurisdiction defense asserted in the same pleading."). As we explained in Hillis , "allowing a defendant in effect to plead alternatively a counterclaim and one or more threshold defenses conserves judicial resources, for if one of the defenses proves successful, the parties need not litigate a claim that the defendant presumably has no interest in asserting independently." 626 F.3d at 1019 (quoting 5C Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1397 (3d ed. 2004) ).

B

The district court dismissed Argonaut's claims for declaratory relief because SFMC asserted its counterclaims only "[i]f the [district court] asserts jurisdiction over Argonaut's declaratory relief claim." The court first noted that conditional pleadings are a recognized part of federal practice even if not expressly addressed in the Federal Rules of Civil Procedure. See, e.g., Evans , 344 F.3d at 1033 n.6. Then, relying on Knapp-Monarch Co. v. Dominion...