Great American Insurance Company v. ALFRED W. GROSS, Commissioner of Insurance, Bureau of Insurance, State Corporation…

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 GREAT AMERICAN INSURANCE
COMPANY,
Plaintiff-Appellant,
v.
ALFRED W. GROSS, Commissioner of
Insurance, Bureau of Insurance,
State Corporation Commission of
the Commonwealth of Virginia, as
Deputy Receiver of THE RECIPROCAL
GROUP and RECIPROCAL OF AMERICA,
in Receivership; PAULA A. FLOWERS,
Commissioner of Commerce and
Insurance for the State of No. 05-2069 
Tennessee, as Liquidator for
DOCTORS INSURANCE RECIPROCAL,
AMERICAN NATIONAL LAWYERS
INSURANCE RECIPROCAL and THE
RECIPROCAL ALLIANCE; KENNETH R.
PATTERSON; CAROLYN B. HUDGINS;
JOHN WILLIAM "B" CREWS; JUDITH A.
KELLEY; RICHARD W.E. "DICK"
BLAND; RONALD K. DAVIS, M.D.;
GORDON D. MCLEAN; THOMAS K.
SMITH; GERALD R. WAGES; WILLIAM
T. SUGG; JOHN N. BETHAY,
Defendants-Appellees. 
Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
James R. Spencer, Chief District Judge.
(CA-05-159-JRS-3)

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Argued: September 18, 2006
Decided: October 30, 2006
Before WILLIAMS, Circuit Judge,
HAMILTON, Senior Circuit Judge, and
Richard L. VOORHEES, United States District Judge for the
Western District of North Carolina, sitting by designation.
Vacated and remanded by published opinion. Senior Judge Hamilton
wrote the opinion, in which Judge Williams and Judge Voorhees
joined.
COUNSEL
ARGUED: Peter Francis Lovato, III, BOUNDAS, SKARZYNSKI,
WALSH & BLACK, L.L.C., Chicago, Illinois, for Appellant. J. Jona-
than Schraub, SANDS, ANDERSON, MARKS & MILLER, McLean,
Virginia, for Appellees. ON BRIEF: Ellen D. Jenkins, BOUNDAS,
SKARZYNSKI, WALSH & BLACK, L.L.C., Chicago, Illinois;
James Skarzynski, Cecilia W. Kaiser, BOUNDAS, SKARZYNSKI,
WALSH & BLACK, L.L.C., New York, New York; John M. Claytor,
Elizabeth E. S. Skilling, HARMAN, CLAYTOR, CORRIGAN &
WELLMAN, Richmond, Virginia, for Appellant. Danny M. Howell,
Paige A. Levy, Timothy K. Halloran, SANDS, ANDERSON,
MARKS & MILLER, McLean, Virginia, for Appellees John William
"B" Crews, Judith A. Kelley, and Gordon D. McLean; Patrick H.
Cantilo, Pierre J. Riou, Susan E. Salch, CANTILO & BENNETT,
L.L.P., Austin, Texas, John Conrad, JoAnne L. Nolte, THE CON-
RAD FIRM, P.C., Richmond, Virginia, for Appellee Alfred W.
Gross, Commissioner of Insurance, Bureau of Insurance, State Corpo-
ration Commission of the Commonwealth of Virginia, as Deputy
Receiver of THE RECIPROCAL GROUP and RECIPROCAL OF
AMERICA, in Receivership; Charles F. Witthoefft, Michael P. Fal-
zone, HIRSCHLER FLEISCHER, P.C., Richmond, Virginia, for
Appellees Kenneth R. Patterson and Carolyn B. Hudgins; Robert M.
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Tyler, Christine D. Mehfoud, MCGUIREWOODS, L.L.P., Rich-
mond, Virginia, Robert F. Northcutt, CAPELL & HOWARD, P.C.,
Montgomery, Alabama, for Appellee John N. Bethay; Russell H.
Roberts, Fredericksburg, Virginia, for Appellee Richard W. E. "Dick"
Bland; Curtis G. Manchester, REED SMITH, L.L.P., Richmond, Vir-
ginia, William H. Farmer, J. W. Luna, FARMER & LUNA, P.L.L.C.,
Nashville, Tennessee, for Appellee Paula A. Flowers, Commissioner
of Commerce and Insurance for the State of Tennessee, as Liquidator
for DOCTORS INSURANCE RECIPROCAL, AMERICAN
NATIONAL LAWYERS INSURANCE RECIPROCAL and THE
RECIPROCAL ALLIANCE; Dana J. Finberg, LECLAIR RYAN,
P.C., Richmond, Virginia, for Appellee Thomas K. Smith; David N.
Anthony, Mark C. Shuford, KAUFMAN & CANOLES, P.C., Rich-
mond, Virginia, G. Brian Jackson, Robert L. Trentham, Taylor B.
Mayes, MILLER & MARTIN, P.L.L.C., Nashville, Tennessee, for
Appellee William T. Sugg; Frank N. Cowan, Deborah S. O’Toole,
COWAN & OWEN, P.C., Richmond, Virginia, for Appellee Ronald
K. Davis; David M. Harris, Ryan J. Gavin, Andrew Margrabe,
GREENSFELDER, HEMKER & GALE, P.C., St. Louis, Missouri,
Bruce M. Marshall, DURRETTEBRADSHAW, P.L.C., Richmond,
Virginia, for Appellee Gerald R. Wages.
OPINION
HAMILTON, Senior Circuit Judge:
Before its financial collapse in 2003, Reciprocal of America (ROA)
was a reciprocal insurer and reinsurer of a variety of insurance risks.
The Reciprocal Group (TRG), which suffered a similar collapse in
2003, served as the management company and attorney-in-fact for
ROA. In January 2000, Great American Insurance Company (Great
American) issued ROA and TRG a $10,000,000 directors’ and offi-
cers’ liability policy (The Policy) and, in May 2001, granted a request
to increase the limit of liability (the Increased Limit) to $20,000,000.
The collapse of both ROA and TRG spawned a series of civil lawsuits
in Alabama state court and numerous federal district courts, as well
as criminal proceedings against two officers of ROA and TRG in the
United States District Court for the Eastern District of Virginia. Fol-
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lowing the guilty pleas in the criminal proceedings, Great American
brought this action in the United States District Court for the Eastern
District of Virginia against, inter alia, numerous officers and directors
of ROA and TRG, seeking rescission of the Policy and the Increased
Limit, recovery of certain defense costs advanced in the pending civil
litigation, and a variety of declarations. Relying on its concern that
allowing Great American’s case to proceed would result in unneces-
sary entanglement with the civil actions in state and federal court, the
district court abstained from entertaining Great American’s suit and
dismissed the case without prejudice. Great American appeals, and
we now vacate the district court’s judgment and remand for further
proceedings.
I
As reciprocal insurers and reinsurers transacting or licensed to
transact business in Virginia, ROA and TRG were subject to regula-
tion by Virginia law.1 ROA initially provided reinsurance only to hos-
pitals, but later began to reinsure physicians and lawyers and to
provide reinsurance coverage for various other lines of business.
Reciprocal insurance results from the mutual exchange of insur-
ance contracts among "persons" in an unincorporated association
under a common name through an attorney-in-fact having authority
to obligate each subscriber both as insured and insurer. Va. Code
Ann. § 38.2-1201(A). As a reciprocal insurer, ROA operated through
its attorney-in-fact, TRG. Attorneys-in-fact act on behalf of reciprocal
insurance companies to perform management duties. Thus, TRG had
the authority to obligate ROA’s subscribers on reciprocal insurance
contracts and to act for and bind each and every ROA subscriber in
all transactions relating to, or arising out of, the operations of ROA.
Id. § 38.2-1201(B).Under Virginia law, ROA was required to submit
annual financial statements prepared in accordance with statutory
accounting practices. Id. § 38.2-1300(A). The purpose of this require-
ment was to ensure that ROA maintained a sufficient financial cush-
ion to enable it to pay claims through difficult financial times. This
1Both ROA and TRG had their principal places of business in Rich-
mond, Virginia, although they had a number of insurance company affili-
ates in other states, including Tennessee and Alabama.
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cushion was required to be maintained through statutory surplus capi-
tal requirements.
In late 1999, ROA/TRG submitted to Great American a request for
renewal of their directors’ and officers’ liability insurance policy. As
part of the underwriting process, Great American undertook a com-
prehensive review of ROA and TRG. Specifically, in connection with
the underwriting of the Policy, Great American received and reviewed
a copy of the proposal form (Policy Proposal Form) that was signed
by the president and CEO of both ROA and TRG, Kenneth Patterson,
on or about January 4, 2000, and submitted to Great American in con-
nection with ROA’s and TRG’s procurement of the Policy.
Attached to the Policy Proposal Form were, among other things,
the audited financial statements of ROA and TRG for the most recent
three years and their most recent interim financial statements. The
Policy Proposal Form stated that these financial statements were
made a part of the proposal. The Policy Proposal Form also repre-
sented that the statements made therein were true and correct and that
reasonable efforts had been made to obtain sufficient information
from each and every director or officer to facilitate the proper and
accurate completion of the Policy Proposal Form.
Based on its review of the completed Policy Proposal Form and
financial statements, Great American issued the Policy in early 2000
to ROA and TRG for the period of December 1, 1999 to December
1, 2002. By endorsement, the Policy period was extended to Decem-
ber 31, 2003 for wrongful acts committed before December 31, 2002.
The Policy as originally issued had an aggregate limit of liability of
$10,000,000. According to Great American, it issued the Policy in
reliance upon, among other things, the accuracy and integrity of the
Policy Proposal Form and the financial statements signed by ROA’s
and TRG’s directors and officers and filed with the Virginia Commis-
sioner of Insurance.
Before agreeing to the Increased Limit in May 2001, Great Ameri-
can required ROA and TRG to answer the following question appear-
ing on a proposal form (the Increased Limit Proposal Form):
Is the undersigned or any Director or Officer proposed for
the increased Limit of Liability aware of any fact, circum-
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stance or situation involving the Company or its Subsidia-
ries or the Directors or Officers of the Company or its
Subsidiaries which he has reason to believe might result in
any future Claim which would fall within the scope of the
Increased Limit of Liability? If "Yes," provide details.
(J.A. 118-19). Patterson, who signed the Increased Limit Proposal
Form in mid to late April 2001, responded "No" to this question. (J.A.
118).
The Increased Limit Proposal Form Patterson signed includes the
following statement:
The undersigned . . . declare that to the best of their knowl-
edge the statements set forth herein are true and correct and
that reasonable efforts have been made to obtain sufficient
information from each and every Director or Officer pro-
posed for this Endorsement for the increase in coverage to
facilitate the proper and accurate completion of this Pro-
posal Form. The undersigned further agrees that if any sig-
nificant adverse change in the condition of the applicant is
discovered between the date of this Proposal Form and the
effective date of the Endorsement for the increase in cover-
age, which would render the Proposal Form inaccurate or
incomplete, notice of such change will be reported in writ-
ing to the Insurer immediately.
(J.A. 119).
Like the Policy Proposal Form, the Increased Limit Proposal Form
also includes the following paragraph:
It is agreed by the COMPANY and the DIRECTORS and
OFFICERS that the particulars and statements contained in
the Proposal Form, (a copy of which will be attached to the
Policy), and any material submitted therewith . . . are the
basis of the Policy and are to be considered as incorporated
in and constituting a part of this Policy. It is further agreed
by the COMPANY and the DIRECTORS and OFFICERS
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that the statements in the Proposal Form or in any material
submitted therewith are their representations, that they are
material and that this Policy is issued in reliance upon the
truth of such representations; provided, however, that except
for material facts or circumstances known to the persons(s)
who subscribed the Proposal Form, any misstatement or
omission in such Proposal Form or materials submitted
therewith in respect of a specific WRONGFUL ACT by a
particular DIRECTOR or OFFICER or his cognizance by
any matter which he has reason to suppose might afford
grounds for a future CLAIM against him shall not be
imputed to any other DIRECTOR or OFFICER for purposes
of determining the validity of this Policy as to such other
DIRECTOR or OFFICER.
(J.A. 119).
In January 2003, a state circuit court in Richmond, Virginia placed
ROA and TRG into receivership and, in June 2003, ordered that the
companies be liquidated. In January 2003, a Tennessee chancery
court placed ROA’s Tennessee affiliates into receivership and, in June
2003, ordered that they be liquidated. The Insurance Commissioner
of Virginia, Alfred Gross, is serving as the deputy receiver of ROA
and TRG, and the Insurance Commissioner of Tennessee, Paula
Flowers, is serving as liquidator of ROA’s Tennessee affiliates.
Following ROA’s collapse and the resultant failure of its insurance
company affiliates, policyholders left without coverage and the Com-
missioners sued numerous former directors and officers of ROA and
TRG in actions now pending before the United States District Court
for the Western District of Tennessee as MDL 1551 and in Alabama
state court (collectively, the Underlying Actions). Generally, the
plaintiffs in the Underlying Actions allege that, beginning in 1991, the
defendants engaged in a protracted scheme to defraud regulators,
insurance rating services, policyholders, creditors, and the public into
believing that ROA and its affiliates were financially sound when, in
fact, they were not. These plaintiffs assert numerous statutory, tort,
and equitable claims arising from the collapse of ROA and its sub-
sidiaries, including, among others, violations of RICO, conspiracy,
fraud, tortious interference with a trust agreement, and breach of fidu-
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ciary duty. After the initiation of the Underlying Actions, Great
American agreed to advance the defendants’ defense costs, subject to
a full reservation of rights.
In late 2003, the United States Attorney for the Eastern District of
Virginia began to investigate the facts and circumstances surrounding
the collapse of ROA and its related companies. On February 7, 2005,
Patterson pled guilty to a three-count criminal information, brought in
federal court in the Eastern District of Virginia, charging him with
one count of conspiracy to commit insurance fraud and two counts of
mail fraud. That same day, Carolyn Hudgins, a former executive vice
president of both TRG and ROA, pled guilty to a one-count criminal
information, likewise brought in federal court in the Eastern District
of Virginia, charging her with conspiracy to commit insurance fraud.
The district court accepted Patterson’s and Hudgins’ guilty pleas on
February 7, 2005. On June 28, 2005, Patterson was sentenced to 150
months’ imprisonment and Hudgins was sentenced to sixty months’
imprisonment.
Hudgins’ guilty plea reveals that, beginning in at least the late
1990s, she and others were engaged in a complex scheme to commit
insurance fraud. Patterson’s guilty plea reveals that, when Patterson
signed the Increased Limit Proposal Form in April 2001, he was
actively participating in an ongoing criminal conspiracy to defraud
insurance regulators and others about the financial condition of ROA.
In his guilty plea, Patterson admitted that, by at least March 2001, he
had joined the conspiracy and that, in or about March 2001, he recog-
nized that he and his coconspirators had mischaracterized a
$10,000,000 transaction on ROA’s books and records.
Following the guilty pleas of both Patterson and Hudgins, Great
American filed the instant four-count complaint against, inter alia,
numerous officers and directors of ROA and TRG.2 The complaint
2In its complaint, Great American did not name each and every officer
of ROA and TRG named in the Underlying Actions. Accordingly, the
relief sought by Great American only applies to the officers and directors
named in Great American’s complaint. For ease of reference, we will
refer to the officers and directors named in Great American’s complaint
as the Insureds.
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sought: (1) rescission of the Policy and the Increased Limit based on
numerous fraudulent and material misrepresentations made in con-
junction with the procurement of the Policy and the Increased Limit;
(2) recovery of defense costs advanced in the Underlying Actions and
a declaration that the Policy obligates the Insureds to refund these
costs; (3) a declaration that the Policy’s fraud exclusion (the Fraud
Exclusion) bars coverage for all losses, including defense costs
incurred by Patterson; and (4) a declaration that the Fraud Exclusion
bars coverage for all losses, including defense costs incurred by
Hudgins.3
In conjunction with its lawsuit, Great American notified the
Insureds that it intended to commence a lawsuit, and, as required by
Virginia law, Great American tendered the premiums paid to Gross,
as representative of ROA and TRG. In light of the guilty pleas and
invoking the Policy’s Fraud Exclusion, Great American also stopped
advancing Patterson’s and Hudgins’ defense costs and demanded the
return of all defense costs it had previously advanced them. Great
American, however, continued to advance defense costs to the other
Insureds. On May 3, 2005, the district court, in a preliminary injunc-
tion, ordered Great American to continue advancing Patterson’s and
Hudgins’ defense costs pending a ruling on the merits.
While this case was pending, several of the Insureds requested that
the Judicial Panel for Multidistrict Litigation (the MDL Panel) trans-
fer the case to the Western District of Tennessee as a tag-along action
to MDL 1551. As far as we can tell from the record, the MDL Panel
declined the request for transfer, concluding that the complaint in this
case was not related to MDL 1551.
3The Fraud Exclusion provides as follows:
The Insurer shall not be liable to make any payment for Loss in
connection with any Claim made against the Directors and Offi-
cers . . . brought about or contributed to by the fraudulent, dis-
honest or criminal acts of the Directors or Officers; provided,
however, that this exclusion shall not apply unless it is estab-
lished in fact that such Claim was brought about or contributed
to by fraudulent, dishonest or criminal acts of the Directors
and/or Officers.
(J.A. 47).
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The Insureds then moved to dismiss Great American’s complaint,
arguing, inter alia, that the district court had the discretionary author-
ity to dismiss the action in favor of the concurrent litigation in the
Underlying Actions. On August 19, 2005, the district court granted
the motion, dismissing the complaint without prejudice. On Septem-
ber 2, 2005, Great American filed a motion for leave to file an
amended complaint, which was denied by the court on September 13,
2005. Great American filed a timely notice of appeal.4
II
On appeal, Great American contends that the district court erred
when it abstained from entertaining its claims for rescission and for
recovery of certain defense costs in the Underlying Actions. Unlike
the remaining claims in Great American’s complaint, these two
claims request nondeclaratory relief.
We review the district court’s abstention decision for an abuse of
discretion. Chase Brexton Health Servs., Inc. v. Maryland, 411 F.3d
457, 464 (4th Cir. 2005). In exercising its discretion to abstain, the
court concluded that allowing Great American’s case to proceed
would result in unnecessary entanglement with the Underlying
Actions. According to the court, the issues necessary to resolve Great
American’s claims would necessarily be resolved in the Underlying
Actions. To avoid piecemeal litigation and potentially inconsistent
results, the court dismissed Great American’s compliant without prej-
udice.
It is well-settled that "our dual system of federal and state govern-
ments allows parallel actions to proceed to judgment until one
becomes preclusive of the other." Id. at 462. Indeed, "[d]espite what
may appear to result in a duplication of judicial resources, ‘[t]he rule
4We note that the dismissal of the complaint dissolved the preliminary
injunction entered by the district court on May 3, 2005. See Wyandotte
Nation v. Sebelius, 443 F.3d 1247, 1253 n.10 (10th Cir. 2006) (noting
that, although a preliminary injunction usually is not subject to a fixed
time limit, it is dissolved by dismissal of the complaint); Venezia v. Rob-
inson, 16 F.3d 209, 211 (7th Cir. 1994) (noting that a preliminary injunc-
tion cannot survive dismissal of the complaint).
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is well recognized that the pendency of an action in the state [system]
is no bar to proceedings concerning the same matter in the Federal
court having jurisdiction.’" McLaughlin v. United Va. Bank, 955 F.2d
930, 934 (4th Cir. 1992) (quoting McClellan v. Carland, 217 U.S.
268, 282 (1910)). Moreover, the Supreme Court has cautioned that
federal courts are bound by a "virtually unflagging obligation . . . to
exercise the jurisdiction given them." Colorado River Water Conser-
vation Dist. v. United States, 424 U.S. 800, 817 (1976). As we noted
in Chase Brexton, "[f]ederal courts ‘have no more right to decline the
exercise of jurisdiction which is given, than to usurp that which is
not.’" 411 F.3d at 462 (quoting Cohens v. Virginia, 19 U.S. (6
Wheat.) 264, 404 (1821)).
The Supreme Court, however, has indicated that, in certain limited
instances, "federal courts may decline to exercise their jurisdiction, in
otherwise ‘exceptional circumstances,’ where denying a federal forum
would clearly serve an important countervailing interest." Quacken-
bush v. Allstate Ins. Co., 517 U.S. 706, 716 (1996) (quoting Colorado
River, 424 U.S. at 813). "These ‘exceptional circumstances’ inevita-
bly relate to a policy of avoiding unnecessary constitutional decisions
and of accommodating federal-state relations. Chase Brexton, 411
F.3d at 462.5
5For example, we noted in Chase Brexton, 411 F.3d at 462 n.1, that the
Supreme Court has held that federal courts have the power to refrain
from entertaining: (1) cases that would interfere with a pending state
criminal proceeding, see Younger v. Harris, 401 U.S. 37 (1971), or with
certain types of state civil proceedings, see Huffman v. Pursue, Ltd., 420
U.S. 592 (1975); (2) cases in which the resolution of a federal constitu-
tional question might be mooted if the state courts were given the oppor-
tunity to interpret ambiguous state law, see R.R. Comm’n of Texas v.
Pullman Co., 312 U.S. 496 (1941); (3) cases raising issues "intimately
involved with [the States’] sovereign prerogative," the proper adjudica-
tion of which might be impaired by unsettled questions of state law, see
La. Power & Light Co. v. City of Thibodaux, 360 U.S. 25, 28 (1959); (4)
cases whose resolution might interfere with state schemes for the collec-
tion of taxes, see Great Lakes Dredge and Dock Co. v. Huffman, 319
U.S. 293 (1943); and (5) cases involving complex state administrative
procedures, see Burford v. Sun Oil Co., 319 U.S. 315 (1943).
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In Colorado River, the Court noted that there were "principles
unrelated to considerations of proper constitutional adjudication and
regard for federal-state relations which govern in situations involving
the contemporaneous exercise of concurrent jurisdictions, either by
federal courts or by state and federal courts." 424 U.S. at 817.
According to the Court, these principles rested on considerations of
"[w]ise judicial administration, giving regard to conservation of judi-
cial resources and comprehensive disposition of litigation." Id. (cita-
tion and internal quotation marks omitted). In general, the pendency
of an action in state court is no bar to proceedings in federal court
concerning the same matter. Id. As between two federal district
courts, the general rule is that duplicative litigation should be avoided.
Id.; cf. Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180,
183-84 (1952) (permitting a district court to stay a declaratory judg-
ment action in the District of Delaware in favor of an underlying
patent infringement action in the Northern District of Illinois to avoid
duplicative litigation). The Court explained that the difference in
approach between federal-state concurrent jurisdiction and wholly
federal concurrent jurisdiction stemmed from the "virtually unflag-
ging obligation of the federal courts to exercise the jurisdiction given
them." Colorado River, 424 U.S. at 817. As the Court explained:
Given this obligation, and the absence of weightier consid-
erations of constitutional adjudication and state-federal rela-
tions, the circumstances permitting the dismissal of a federal
suit due to the presence of a concurrent state proceeding for
reasons of wise judicial administration are considerably
more limited than the circumstances appropriate for absten-
tion. The former circumstances, though exceptional, do nev-
ertheless exist.
Id. at 818.6
6This court in Chase Brexton and several other circuits have amplified
the general policy against concurrent federal litigation expressed in Colo-
rado River. Basically, these decisions suggest that a district court may
stay or dismiss a suit that is duplicative of another federal court suit as
part of its general power to administer its docket. See Chase Brexton, 411
F.3d at 463; Missouri ex rel. Nixon v. Prudential Health Care Plan, Inc.,
259 F.3d 949, 953-54 (8th Cir. 2001); Curtis v. Citibank, N.A., 226 F.3d
12 GREAT AMERICAN INS. v. GROSS

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In assessing whether Colorado River abstention is appropriate, we
must remain mindful that this form of abstention "is an extraordinary
and narrow exception to the duty of a District Court to adjudicate a
controversy properly before it" and that "[a]bdication of the obligation
to decide cases can be justified under [abstention] only in the excep-
tional circumstances where the order to the parties to repair to the
state court would clearly serve an important countervailing interest."
Id. at 813 (citation and internal quotation marks omitted). Accord-
ingly, our task "is not to find some substantial reason for the exercise
of federal jurisdiction by the district court; rather, the task is to ascer-
tain whether there exist ‘exceptional’ circumstances, the ‘clearest of
justifications,’ . . . to justify the surrender of that jurisdiction." Moses
H. Cone Mem. Hosp. v. Mercury Const. Corp., 460 U.S. 1, 25-26
(1983) (citation and internal quotation marks omitted).
The threshold question in deciding whether Colorado River absten-
tion is appropriate is whether there are parallel federal and state suits.
Chase Brexton, 411 F.3d at 463. If parallel suits exist, then we must
carefully balance several factors "with the balance heavily weighted
in favor of the exercise of jurisdiction." Moses H. Cone, 460 U.S. at
16. Although the decision to dismiss a federal suit because of parallel
state-court litigation does not rest on a checklist, id., six factors have
been identified to guide the analysis: (1) whether the subject matter
133, 138 (2d Cir. 2000); Serlin v. Arthur Andersen & Co., 3 F.3d 221,
223 (7th Cir. 1993); Zerilli v. Evening News Ass’n, 628 F.2d 217, 222
(D.C. Cir. 1980); Walton v. Eaton Corp., 563 F.2d 66, 70 (3d Cir. 1977)
(en banc). In this case, there is no evidence that Great American’s action
is duplicative to any of the actions pending in MDL 1551, in the sense
that it involves the same parties and the same controversy, and that MDL
1551 offers a definitive and comprehensive avenue to resolve the issues
raised in this case. Indeed, as far as we can tell from the record, the MDL
Panel declined a request to transfer this case to MDL 1551 as a tag-along
action, concluding this action was not related to the actions pending
before the MDL Panel. For these reasons, we will confine our Colorado
River analysis to determining whether the district court erred when it dis-
missed Great American’s action in favor of the concurrent Alabama state
court litigation. There are no adverse consequences to this analytical
approach, as the parties seem to concede that the liability issues raised
in MDL 1551 are analogous to the issues raised in Alabama state court.
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of the litigation involves property where the first court may assume
in rem jurisdiction to the exclusion of others; (2) whether the federal
forum is an inconvenient one; (3) the desirability of avoiding piece-
meal litigation; (4) the relevant order in which the courts obtained
jurisdiction and the progress achieved in each action; (5) whether
state law or federal law provides the rule of decision on the merits;
and (6) the adequacy of the state proceeding to protect the parties’
rights. Chase Brexton, 411 F.3d at 463-64. In the final analysis,
abstention is the exception, not the rule, and it may be considered
only when "the parallel state-court litigation will be an adequate vehi-
cle for the complete and prompt resolution of the issues between the
parties." Moses H. Cone, 460 U.S. at 28.
Turning to whether the present action is parallel to the actions in
Alabama state court, while it is true that the parties in Colorado River
were not identical to the parties in the "parallel" state action, at least
the federal plaintiff was a party to the state action. 424 U.S. at 805-
06. In this case, Great American is not a party to any of the Alabama
state court actions. Accordingly, to abstain in favor of the Alabama
state court actions would deprive Great American of the opportunity
to litigate its claims. Moreover, we have strictly construed the require-
ment of parallel federal and state suits, requiring that the parties
involved be almost identical. "Suits are parallel if substantially the
same parties litigate substantially the same issues in different
forums." Chase Brexton, 411 F.3d at 464 (internal quotation marks
omitted).
In addition to the lack of similarity of the parties, the scope of
Great American’s claims are not parallel. The issues in Great Ameri-
can’s action (which include whether Great American can rescind the
Policy and whether it can recover money advanced for defense costs)
and the issues in the cases being litigated in Alabama state court are
dissimilar. Whether Patterson lied when he completed the Proposal
Forms, whether Great American’s underwriter relied on his lies, and
whether they were material to the risk Great American undertook
when it issued the Policy and, later, doubled its liability limit, are
questions of fact and law that will not be resolved in any other action.
Moreover, the remedies sought by Great American and the plaintiffs
in the Alabama state court actions are entirely different. The Alabama
state court actions have nothing to do with insurance remedies (such
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as rescission and the recovery of money advanced for defense costs)
and, thus, will not provide an adequate vehicle for the complete and
prompt resolution of the issues between the parties in this case. More
critically, there is no guarantee that the issues litigated in the Alabama
state court actions will include the facts necessary for Great American
to prove its claim for rescission and its claim for recovery of certain
defense costs. The issues raised in the Alabama state court actions
generally pertain to acts intended to defraud regulators, insurance rat-
ing services, policyholders, creditors, and the public over an extended
period of time, while this case concerns a more discrete period of time
and ROA’s and TRG’s contacts with Great American. While it is con-
ceivable that the plaintiffs in the Alabama state court actions will
attempt to prove that the information allegedly relied upon by Great
American was fraudulent, it does not necessarily follow that the plain-
tiffs are required to do so to prevail in the Alabama state court
actions. It may well be that the plaintiffs in the Alabama state court
actions will rely on other fraudulent conduct, unrelated to the facts
necessary for Great American to prove its case. Thus, the district
court simply was incorrect when it concluded that all of the issues
necessary to resolve Great American’s case would be resolved in the
Underlying Actions. Without going further, it is evident that the dis-
trict court erred when it dismissed Great American’s claim for rescis-
sion and claim to recover money advanced for defense costs in favor
of the concurrent Alabama state court actions.
Even if we get to the Colorado River factors, they favor Great
American. Consideration of the first and second factors—whether the
subject matter of the state court litigation involves in rem jurisdiction
or whether the federal forum is an inconvenient one—do not provide
any support for abstention. With respect to the third factor, the desir-
ability of avoiding piecemeal litigation, as noted above, the issues in
this action and in the Alabama state court actions are dissimilar. The
rescission claim and the claim to recover money advanced for defense
costs involve the nuances of insurance law, while the Alabama state
court actions do not. Moreover, as noted above, it is not a foregone
conclusion that the litigation in the Alabama state court actions will
include factual findings necessary to resolve the issues presented in
this case. Thus, given the marked differences between the critical fac-
tual and legal issues presented in the different forums, the danger of
piecemeal litigation is remote, at best.
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The fourth factor—the order in which jurisdiction was obtained by
the courts—does counsel in favor of abstention since the plaintiffs in
the Alabama state court actions filed their claims before Great Ameri-
can filed the instant action and the litigation in Alabama state court
is further along. See Moses H. Cone, 460 U.S. at 21. The fifth factor
—whether state law or federal law provides the rule of decision on
the merits—is a nonfactor because, although the insurance issues pre-
sented require application of Virginia law, there is no related proceed-
ing in any Virginia state court. The only related state court proceed-
ings are underway in Alabama. On balance, Virginia’s interest would
seem better served by having the coverage issues decided by a federal
court sitting in Virginia, rather than a state court sitting in Alabama.
Moreover, considering the district court’s familiarity with Patterson’s
and Hudgins’ criminal proceedings, it is reasonable to conclude that
it is better suited than an Alabama state court to resolve Great Ameri-
can’s rescission claim and its claim to recover money it advanced for
defense costs.
The sixth factor—whether the state court proceeding will ade-
quately protect the rights of the parties seeking to invoke federal
jurisdiction—also weighs against abstention. As noted, the Alabama
state court actions do not involve the nuances of Virginia insurance
law and, as a nonparty to the state court litigation, it is a debatable
question whether Great American would be precluded from relitigat-
ing any overlapping issues, if there are any.
In tallying the relevant factors and considering them against the
larger policies underlying Colorado River abstention, we conclude
that this case does not present exceptional circumstances justifying a
federal court surrendering its jurisdiction.
Having concluded that the district court erred when it abstained
from deciding Great American’s rescission claim and the claim seek-
ing to recover money advanced for defense costs, we are left with the
question of whether the court was at liberty at that point to abstain
from entertaining the declaratory claims. While it is true that the
granting of declaratory relief is entrusted to the discretion of the dis-
trict court, see 28 U.S.C. § 2201 (providing that "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
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such declaration"), see also Wilton v. Seven Falls Co., 515 U.S. 277,
286 (1995) (noting that, in the case of declaratory judgment actions,
courts have greater discretion to defer to a parallel state proceeding);
Brillhart v. Excess Ins. Co., 316 U.S. 491, 495 (1942) (same), "when
a plaintiff seeks relief in addition to a declaratory judgment, . . . then
the entire benefit derived from exercising discretion not to grant
declaratory relief is frustrated, and a stay would not save any judicial
resources." Chase Brexton, 411 F.3d at 466. Moreover, when the
claims for which declaratory relief are requested are so closely inter-
twined with the nondeclaratory claims, "judicial economy counsels
against dismissing the claims for declaratory judgment relief while
adjudicating" the nondeclaratory claims. Id. at 466-67. Under Chase
Brexton, once the court was required to entertain Great American’s
rescission claim and the claim seeking to recover money advanced for
defense costs, it was not at liberty to abstain from entertaining the
declaratory claims because the claims were so intertwined with the
nondeclaratory claims.
In support of the district court’s abstention decision, the Insureds
argue that, because the complaint alleges both declaratory and nonde-
claratory claims, we are at liberty to apply the more relaxed standard
governing claims brought under the Declaratory Judgment Act, 28
U.S.C. § 2201, to Great American’s entire complaint, even the claims
requesting nondeclaratory relief. As noted above, under Colorado
River, federal litigation may be stayed in favor of parallel state pro-
ceedings only under exceptional circumstances. 424 U.S. at 817.
Moreover, in the case of declaratory judgment actions, courts have
greater discretion to defer to a parallel state court proceeding under
the discretionary standard developed in Brillhart and Wilton. See Wil-
ton, 515 U.S. at 286; Brillhart, 316 U.S. at 495.7 When a complaint
7The broad discretionary Brillhart/Wilton standard governing a district
court’s determination whether to exercise jurisdiction over a declaratory
judgment action in which there are parallel state court proceedings dif-
fers from the Colorado River exceptional circumstances standard
because "[d]istinct features of the Declaratory Judgment Act . . . justify
a standard vesting district courts with greater discretion in declaratory
judgment actions." Wilton, 515 U.S. at 286. In such a context, obligatory
jurisdiction yields to considerations of practicality and wise judicial
administration. Id. at 288.
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states claims for both nondeclaratory and declaratory relief, there is
a question as to which standard—Colorado River or Brillhart/Wilton
—governs the decision whether to order a stay in favor of the parallel
state proceedings. Some courts have held that the Brillhart/Wilton dis-
cretionary standard is per se supplanted by the harsher Colorado
River standard whenever an action includes both declaratory and non-
frivolous nondeclaratory claims. See Kelly Inv., Inc. v. Continental
Common Corp., 315 F.3d 494, 497 n.4 (5th Cir. 2003); Village of
Westfield v. Welch’s, 170 F.3d 116, 124 n.5 (2d Cir. 1999). Other
courts hold that jurisdiction is mandatory (subject only to Colorado
River constraints) if the nondeclaratory claims can exist indepen-
dently of the declaratory claims, such that they could survive even if
the declaratory claims vanished. See United Nat’l Ins. Co. v. R&D
Latex Corp., 242 F.3d 1102, 1112-13 (9th Cir. 2001). Another view,
embraced by some district courts, looks to the "heart of the action"
to determine if the Colorado River or the Brillhart/Wilton standard
should apply. See, e.g., ITT Indus., Inc. v. Pacific Employers Ins. Co.,
427 F. Supp. 2d 552, 555-56 (E.D. Pa. 2006). Under this standard, if
the outcome of the nondeclaratory claims hinges on the outcome of
the declaratory ones, the Brillhart/Wilton standard governs; con-
versely, if the opposite applies, the Colorado River standard controls.
See Lexington Ins. Co. v. Rolison, 434 F. Supp. 2d 1228, 1326 (S.D.
Ala. 2006).
Our jurisprudence suggests that, in a "mixed" complaint scenario,
the Brillhart/Wilton standard does not apply, at least to the nonde-
claratory claims. For example, in Chase Brexton, we stated that the
Brillhart/Wilton standard does not apply when a declaratory judgment
claim is joined with a nondeclaratory claim, such as a claim for dam-
ages or injunctive relief. 411 F.3d at 466-67. Because a court is
required to address nondeclaratory claims, per Colorado River, we
observed that the benefit derived from exercising discretion not to
grant declaratory relief is frustrated. Id. at 466.
In Myles Lumber Company v. CNA Financial Corporation, we held
that a district court had no discretion to remand claims for damages
joined with a claim for declaratory relief. 233 F.3d 821, 823-24 (4th
Cir. 2000). In so holding, we noted that a claim that seeks a declara-
tion under an insurance contract arguably presents a claim for dam-
ages. Id. at 824 n.2. In view of this latter holding, we applied the
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Brillhart/Wilton standard to the declaratory claim, assuming without
deciding that the standard applied to the declaratory claim at issue. Id.
at 824.
We need not express a definitive view on this point to resolve the
Insureds’ argument, because even if we applied the more relaxed
Brillhart/Wilton standard to Great American’s complaint, the result
would not change. To determine whether to proceed with a federal
declaratory judgment action when a parallel state court action is pend-
ing, we have focused on four factors: (1) whether the state has a
strong interest in having the issues decided in its courts; (2) whether
the state court could resolve the issues more efficiently than the fed-
eral court; (3) whether the presence of overlapping issues of fact or
law might create unnecessary entanglement between the state and fed-
eral court; and (4) whether the federal action is mere procedural fenc-
ing in the sense that the action is merely the product of forum
shopping. Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d 371,
377 (4th Cir. 1994).
Initially, we do not think there is a compelling state interest in hav-
ing the particular issues raised in this action decided in the state courts
of Alabama. As noted, all of the issues of insurance coverage raised
here are governed by the substantive law of Virginia, not Alabama.
But even if there was a Virginia state case pending, that fact alone
would not provide a justification for declining to exercise federal
jurisdiction. In analogous situations in which a federal court possesses
discretionary power to abstain from deciding state-law questions oth-
erwise properly within its jurisdiction, that discretion may be exer-
cised only when the questions of state law involved are difficult,
complex, or unsettled. Id. at 378. In this case, the questions of state
law raised in the federal action are not difficult or problematic;
instead, they involve the routine application of settled principles of
insurance law to particular disputed facts. Virginia’s interest in having
those issues decided in its own courts, which is no stronger than it is
in any case in which a federal court has jurisdiction over a claim in
which state law provides the rule of decision, is not sufficiently com-
pelling to weigh against the exercise of federal jurisdiction. Id.
As to the second factor, we cannot conclude that the issues raised
in this action can be more efficiently resolved in the Alabama state
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courts. In evaluating these efficiency concerns, the Supreme Court
has directed us to focus primarily on "whether the questions in contro-
versy between the parties to the federal suit . . . can better be settled
in the proceeding[s]" that are already "pending in the state court[s]."
Brillhart, 316 U.S. at 495. This in turn requires careful inquiry into
"the scope of the pending state court proceeding[s]," including such
matters as "whether the claims of all parties in interest [to the federal
proceeding] can satisfactorily be adjudicated in that proceeding,
whether necessary parties have been joined, [and] whether such par-
ties are amenable to process in that proceeding." Id.
After examining the scope of the pending state court proceedings
in Alabama, we cannot say with any confidence that the issues raised
in this federal action can better be resolved in those proceedings, or
necessarily be resolved at all. As noted above, the basic dispute here
involves insurance coverage and is comparatively more limited in
scope than the proceedings in Alabama state court. Insurance cover-
age issues are not directly raised in the pending state court proceed-
ings, which involve entirely separate and independent questions of
liability. Moreover, it is not clear to us that Great American can
become part of the Alabama state court actions. Finally, that the
issues raised here might be resolved in some yet-to-be filed action
brought in Virginia state court is not alone sufficient to justify dis-
missal of this action. See Nautilus Ins. Co., 15 F.3d at 379.
As to the third factor, permitting this federal action to go forward
would not result in the unnecessary entanglement between the federal
and state court systems. This is not a case where many of the issues
of law and fact sought to be adjudicated in the federal action are
already being litigated by the same parties in the related state court
action. As noted above, the basic issue sought to be resolved here
involves insurance coverage, and Great American is not even a party
in any of the Alabama state court actions, which involve distinct and
more factually complex issues.
Finally, we are satisfied that the federal action pending here is not
being used merely as a device for procedural fencing. This is not a
case in which a party has raced to federal court in an effort to get cer-
tain issues that are already pending before the state courts resolved
first in a more favorable forum, for the issues presented in this action
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are not the same as those raised in the pending Alabama state court
actions. This action was filed in an entirely proper effort to obtain
prompt resolution of a dispute over a liability insurer’s obligation to
its insureds and to recover money the insurer claims it was entitled
to recover. This dispute is separate and independent from the ongoing
litigation in Alabama state court. Moreover, Great American chose a
commendable path, by paying defense costs while pursuing rescission
and the recovery of those costs, instead of simply rescinding unilater-
ally and waiting to be sued. Under these circumstances, it cannot be
said that Great American is engaging in procedural fencing. Thus,
even if we were to apply the discretionary Brillhart/Wilton standard,
we would be constrained to conclude that the court below abused its
discretion when it abstained from entertaining the claims raised in
Great American’s complaint.
III
For the reasons stated herein, the judgment of the district court is
vacated and the case is remanded for further proceedings consistent
with this opinion.
VACATED AND REMANDED
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