Ninth Circuit Holds That Conditional Counterclaim for Damages Does Not Bring Declaratory Action Within Court’s Mandatory Jurisdiction

In Argonaut Ins. Co. v. St. Francis Med. Cntrs., No. 19-17314 (9th Cir. Nov. 17, 2021), the Ninth Circuit holds that the ordinary rule that (1) a declaratory-relief claim brought under 28 U.S.C. § 2201 becomes mandatory if combined with a monetary claim does not apply if (2) the monetary claim is a conditional counterclaim by the defendant.

Argonaut filed a federal declaratory judgment to avoid coverage in a decades’-long sexual abuse scandal involving a St. Francis (SFMC) doctor. “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.’”

SFMC then moved to have the declaratory action dismissed under the discretionary jurisdiction governing declaratory claims under the decisional law of Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942), and Gov’t Emps. Ins. Co. v. Dizol, 133 F.3d 1220 (9th Cir. 1998) (en banc). “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.”

The Ninth Circuit affirms both on the jurisdictional issue and the exercise of discretion rejecting the case.

Because the Declaratory Judgment Act states the federal courts “may declare the rights and other legal relations of any interested party seeking such declaration” (emphasis added), the controlling decisional law gives federal district courts discretion not to hear such cases, as guided by the relevant factors from Brillhart. But an exception to this discretion occurs – under the Ninth Circuit’s authority in Dizol – when “independent” claims for money damages are joined with an action for declaratory relief. “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.”

“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.”

The court ground its analysis in the operation of the Federal Rules of Civil Procedure, which allow parties to contest jurisdiction while also filing counterclaims. “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 . . . . 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.”

The panel continues from this premise that conditional pleadings, although not specifically recognized in the federal rules, are nevertheless “a recognized part of federal practice.” And in this case, the panel holds, SFMC’s counterclaims were conditional. “By pairing its objection to jurisdiction with what are ‘in effect’ a set of ‘alternatively’ pled counterclaims, SFMC did not invoke the district court’s mandatory jurisdiction . . . . Rather, SFMC’s assertion of its counterclaims against Argonaut, together with its answer, was subject to SFMC’s threshold objections. To hold otherwise would be to allow one of SFMC’s pleadings to defeat the other, even though SFMC pleaded them in a manner explicitly allowed by the Rules.”

The panel also rejects Argonaut’s argument that SFMC waived its objection to jurisdiction by continuing to litigate after the pleadings stage. “SFMC did not waive its defense by engaging in what would be necessary litigation procedures in the event the district court retained jurisdiction and SFMC’s counterclaims moved forward. A district court has discretion to decline jurisdiction ‘before trial or after all arguments have drawn to a close.’ . . . . Accordingly, because SFMC did not waive its threshold defense, the district court still had discretionary jurisdiction.”

Finally, the panel holds that the district court did not abuse its discretion in denying jurisdiction over the declaratory action. “Here, the district court properly noted that the declaratory claims could be filed in state court and that deciding them would not settle all aspects of the controversy or clarify the parties’ legal relationships. Its discussion of the Brillhart and Dizol factors was sufficient to allow for appellate review of its decision to dismiss rather than stay.”

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