SUTTON v. EVEREST NATIONAL INSURANCE COMPANY

Citation Codes

Equivalent Citations

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Docket Number

Case No. 07-cv-00425-WYD-BNB.

Motions

Motion to stay : Denied

Judges

Boyd Boland

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Smart Summary

Factual and Procedural Background

This case arises from guaranties under which Robert E. Sutton and three companies he controls (collectively, the "Guarantors") absolutely and unconditionally guaranteed reinsurance obligations owed to Everest National Insurance Company by another entity owned by Sutton, Founders Reinsurance Company Ltd. Founders allegedly breached its reinsurance obligations by failing to fund a trust account, prompting Everest to demand Sutton honor his guaranty. Instead of responding or fulfilling this obligation, Sutton filed this declaratory judgment action seeking a declaration that he is not liable and an injunction preventing Everest from collecting money from him. The defendants contend that Sutton's lawsuit improperly attempts to preempt an anticipated breach-of-contract suit by Everest and circumvent a forum-selection clause requiring enforcement actions to be brought in New Jersey.

Procedurally, the defendants filed a Motion to Dismiss Or, In the Alternative, To Transfer Venue, arguing that the declaratory judgment action is an improper anticipatory procedural tactic and that venue should be transferred to New Jersey pursuant to the forum-selection clause. The defendants also filed a Motion to Stay Discovery, Vacate Scheduling/Planning Conference and Defer Fed.R.Civ.P. 16 Scheduling Process, seeking to stay all proceedings pending resolution of the motion to dismiss. The Magistrate Judge denied the motion to stay.

Legal Issues Presented

Whether the court should grant a stay of discovery and other proceedings pending resolution of the defendants' motion to dismiss or transfer venue.
Whether the declaratory judgment action filed by Sutton constitutes an improper anticipatory procedural tactic ("procedural gamesmanship").
Whether venue should be transferred to the District of New Jersey pursuant to the forum-selection clause contained in the guaranties.

Arguments of the Parties

Defendants' Arguments

The declaratory judgment action is an improper use of the declaratory judgment rule because Sutton filed it in anticipation of another proceeding, constituting procedural gamesmanship.
The case should be dismissed or transferred to the District of New Jersey based on the forum-selection clause in the guaranties, which permits enforcement actions to be brought in New Jersey courts.
The defendants requested a stay of discovery and other proceedings pending resolution of their motion to dismiss or transfer venue.

Plaintiff's Arguments

The opinion does not contain a detailed account of the plaintiff's legal arguments beyond the request for declaratory and injunctive relief.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Federal Deposit Ins. Corp. v. Renda, 1987 WL 348635 (D. Kan. Aug. 6, 1987)	Identification of five critical factors to consider when deciding whether to stay proceedings, including the interests of the parties, the court, non-parties, and the public.	The court applied these five factors to balance competing interests and concluded that a stay was not warranted in this case.
String Cheese Incident, LLC v. Stylus Shows, Inc., 2006 WL 894955 (D. Colo. March 30, 2006)	Affirmation of the same five-factor test for deciding whether to grant a stay of proceedings.	The court cited this case to support its reliance on the five-factor balancing test and to confirm local policy against staying discovery pending a motion to dismiss.

Court's Reasoning and Analysis

The court began by recognizing that the Federal Rules of Civil Procedure do not provide for automatic stays of proceedings pending a motion to dismiss. Rule 1 emphasizes the need for just, speedy, and inexpensive determination of actions, and Rule 26(c) permits stays of discovery only when justice requires protection from undue burden or expense.

The court applied the five-factor test from FDIC v. Renda and String Cheese Incident, considering:

The plaintiff's interest in proceeding expeditiously and potential prejudice from delay;
The burden on the defendants;
The convenience to the court;
The interests of non-parties;
The public interest.

The court noted that the average time for disposition of dispositive motions in the district was 7.5 months, and staying discovery would likely cause substantial delay with negative consequences, including diminished evidentiary quality and increased costs. Statistically, motions to dismiss are often denied in whole or part, so delay pending such motions is often unnecessary.

The defendants would inevitably bear litigation costs regardless of venue, and the defendants' decision to file a related action in New Jersey after this case was filed contributed to any duplicated effort. The court found no obvious basis to conclude the motion to dismiss would be granted. The local policy disfavors staying discovery pending motions to dismiss to avoid burdening the court and public with delay.

Balancing these considerations, the court concluded that a stay of discovery and proceedings was not justified.

Holding and Implications

The court DENIED the defendants' Motion to Stay Discovery, Vacate Scheduling/Planning Conference and Defer Fed.R.Civ.P. 16 Scheduling Process.

The direct effect of this decision is that discovery and case management will proceed without delay despite the pending motion to dismiss. The court did not set new precedent but reaffirmed the district's policy against automatic stays pending motions to dismiss, emphasizing the importance of avoiding unnecessary delay and expense in litigation.

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ROBERT E. SUTTON, Plaintiff, v. EVEREST NATIONAL INSURANCE COMPANY, an Arizona corporation, and EVEREST REINSURANCE COMPANY, a Delaware corporation, Defendants.

ORDER

BOYD BOLAND, Magistrate Judge

This matter is before me on the Motion to Stay Discovery, Vacate Scheduling/Planning Conference and Defer Fed.R.Civ.P. 16 Scheduling Process [Doc. # 16, filed 5/4/2007] (the "Motion to Stay"). The Motion to Stay is DENIED.

This is an action for declaratory and injunctive relief. According to the defendants:

This lawsuit arises out of Guaranties under which [plaintiff] Sutton and three of his companies, WK Capital, Centrix Consolidated, and Centrix CM, (collectively the "Guarantors") absolutely and unconditionally guaranteed reinsurance obligations owed to Everest by another business entity owned by Sutton, Founders Reinsurance Company Ltd. . . . Founders breached its reinsurance obligations to Everest by failing to fund a trust account, and Everest subsequently asked Sutton to honor his promise under his Guaranty. . . . Rather than fulfill his promise (or at least give Everest the courtesy of a response), Sutton filed the instant lawsuit against Everest seeking to avoid his Guaranty. By doing so, Sutton improperly sought to preempt an anticipated breach-of-contract suit by Everest, circumvent Everest's bargained-for right to file an enforcement action in New Jersey under an express forum-selection clause in the Guaranty, and delay fulfillment of his obligations under the Guaranty.

Motion to Stay at pp. 1-2. The plaintiff reqests a declaration that he is not liable to Everest and an injunction preventing Everest from taking any steps to collect money from Sutton. Complaint at p. 5.

The defendants seek to stay the case pending a determination of their Motion to Dismiss Or, In the Alternative, To Transfer Venue [Doc. # 6, filed 3/9/2007] (the "Motion to Dismiss"). In the Motion to Dismiss, the defendants argue that this action should be (1) dismissed as an improper use of the declaratory judgment rule because Sutton engaged in "procedural gamesmanship" and filed this action "in anticipation of another proceeding," id. at pp. 7-8; or (2) transferred to the United States District Court for the District of New Jersey based on a forum selection clause contained in the guarantees which provides that "any action or proceeding . . . to enforce, or arising out of, this Guaranty may be commenced in state or federal court in any county in the State of New Jersey. . . ." Id. at p. 12, and Exh. 4 at ¶ 9(h) (emphasis added).

The Federal Rules of Civil Procedure do not provide for the stay of proceedings while a motion to dismiss is pending. Instead, Rule 1 instructs that the rules of procedure "shall be construed and administered to secure the just, speedy, and inexpensive determination of every action," and Rule 26(c) permits a court to "make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense," including entry of a stay of discovery. In considering whether to grant a stay:

Five factors have been universally recognized as being critical to a proper balancing of the competing interests at stake. Those factors are: (1) the interests of the plaintiff in proceeding expeditiously with the civil action and the potential prejudice to plaintiffs of a delay; (2) the burden on the defendants; (3) the convenience to the court; (4) the interests of persons not parties to the civil litigation; and (5) the public interest.

Federal Deposit Ins. Corp. v. Renda, 1987 WL 348635 * 2 (D. Kan. Aug. 6, 1987); accord String Cheese Incident, LLC v. Stylus Shows, Inc., 2006 WL 894955 *3 (D. Colo. March 30, 2006) (same). Considering these factors leads me to conclude that a stay of proceedings, including a stay of discovery, is not warranted in this case.

The average time from the filing of a dispositive motion to its determination in this district in 2006 was 7.5 months. Consequently, staying the case while the defendants' motion to dismiss is pending could substantially delay the ultimate resolution of the matter, with injurious consequences. In this regard, it has been argued that:

Delay is an element indigenous to many systems, and one that can have significant implications unless recognized and accounted for.

* * *

In the litigation context, delay is not only a practical concern, as it results in a decrease in evidentiary quality and witness ability, but also of social concern, as it is cost prohibitive and threatens the credibility of the justice system.

Mariel Rodak, It's About Time: A Systems Thinking Analysis of the Litigation Finance Industry and Its Effect on Settlement, 155 U. PA. L. REV. 503, 528 (2006).

Motions to dismiss are denied in whole or in part more often than they result in the termination of a case. Consequently, without attempting to prejudge the district judge's ruling on the defendants' motion to dismiss, it is more likely than not from a statistical standpoint that a delay pending a ruling on the motion to dismiss would prove unnecessary.

Defendants always are burdened when they are sued, whether the case ultimately is dismissed, summary judgment is granted, the case is settled, or a trial occurs. That is a consequence of our judicial system and the rules of civil procedure. The dispute between these parties will proceed in some court — either here or in the district of New Jersey. Consequently, the defendants cannot avoid altogether the costs of litigation. In addition, the defendants filed a related action in the District of New Jersey after this case was filed, and any duplicated effort or cost is the result of the defendants' conduct and decision to dispute the forum where the action will proceed. Thus, any special burden on the defendants in this case is of their own making. In addition, I have reviewed the defendants' Motion to Dismiss, and it is not obvious to me that it necessarily will be granted.

It generally is the policy in this district not to stay discovery pending a ruling on a motion to dismiss. This policy recognizes the burdens to the court and to the public in delaying, potentially for months, those cases where a motion to dismiss is filed.

On balance, I find that this case should not be stayed pending a resolution of the Motion to Dismiss.

IT IS ORDERED that the Motion to Stay is DENIED.