Sellers v. Nationwide Mutual Fire Insurance Company et al
MEMORANDUM OPINION Signed by Chief Judge Karon O Bowdre on 9/27/16. (SAC )
2016 Sep-27 AM 11:50
U.S. DISTRICT COURT
N.D. OF ALABAMA
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
RONALD SELLERS, as assignee of
GARY GARDNER & GARY
GARDNER BUILDERS, INC.,
NATIONWIDE MUTUAL FIRE
INSURANCE COMPANY and STEVE
DURHAM d/b/a S. DURHAM
CIVIL ACTION NO.:
The Plaintiff Ronald Sellers sued Nationwide and Steve Durham in the Circuit Court of
Jefferson County, Alabama pursuant to Ala. Code § 27-23-2, known as Alabama’s Direct Action
Statute. (Doc. 1-1). Nationwide timely removed the case to this court and filed a Motion for
Summary Judgment. (Doc. 13). Because Nationwide fails to show that it is entitled to judgment
as a matter of law, the court DENIES its motion. Mr. Sellers has also moved for entry of default
judgment against Mr. Durham. (Doc. 20). The court DENIES Mr. Sellers's motion at this time
Ronald Sellers entered into a contract with Gary Gardner and Gardner Builders, Inc., for
the construction of a home. Mr. Gardner then hired Steve Durham, d/b/a S. Durham
Construction, to perform footing and foundation work on the house. After Mr. Sellers moved into
the home, he discovered construction defects, some of which involved the foundation work.
According to Mr. Sellers, both Mr. Gardner and Mr. Durham refused to correct the defects.
On June 24, 2008, Mr. Sellers sued Mr. Gardner and Mr. Durham in the Circuit Court of
Jefferson County, Alabama.1 Mr. Gardner then filed cross-claims against Mr. Durham.
Mr. Durham filed a Chapter 7 bankruptcy petition in July of 2010 while the state court
action was pending. At that time, Mr. Sellers filed a motion in bankruptcy court seeking relief
from the stay to pursue his state court claims against Mr. Durham. The bankruptcy court granted
Mr. Sellers's motion in part.2 The bankruptcy court’s order lifted the stay to permit Mr. Sellers to
prosecute his pending claims in his state court lawsuit against Mr. Durham and required Mr.
Sellers to limit his collection efforts to the extent of the available insurance benefits.
In August of 2010, Mr. Gardner sought relief from the bankruptcy court stay to pursue his
claims against Mr. Durham in state court. The bankruptcy court entered a courtroom deputy note
regarding Mr. Gardner’s motion that stated “this matter is settled and the parties are to submit a
proposed order.” (Doc. 13-6 at 2). The bankruptcy court discharged Mr. Durham from
The bankruptcy court’s August 9, 2010 order partially granting Mr. Sellers’s motion for
relief from stay reads:
Based on the pleadings filed in this matter and agreement of the parties, the Motion
for Relief from Stay (Doc #10) is Granted, in part. The lift of the stay will permit
Plaintiffs to prosecute their claims in the State Court lawsuit of Ronald and Kimberly
Sellers v. Steve Durham d/b/a S. Durham Contracting, et. al. pending in the Circuit
Court of Jefferson County, Alabama, CV-2008-1910. However, in the event of a
judgment against the debtor, Plaintiffs shall limit their collection efforts to the extent
of available insurance benefits only. The Plaintiffs may not attempt to enforce any
judgment against any other asset of the Bankruptcy Estate.
bankruptcy on October 8, 2010. The court never granted Mr. Gardner’s motion for relief from the
stay prior to Mr. Durham’s discharge.
Meanwhile, on October 19, 2011, Mr. Sellers and Mr. Gardner entered into a settlement
agreement in the state court action by which Mr. Sellers released all claims against Mr. Gardner
in exchange for a receipt of $100,000 from Mr. Gardner and the assignment of Mr. Gardner’s
claims against Mr. Durham. (Docs. 13-18 and 13-19). Following the assignment, Mr. Sellers, as
Mr. Gardner’s assignee, amended Mr. Gardner’s earlier cross claim in the state court action to
assert various claims of breach of contract, breach of warranty, negligence, and indemnity against
Mr. Durham. (Doc. 13-10).
On July, 15, 2011, Nationwide filed a complaint for declaratory judgment in the United
States District Court for the Northern District of Alabama to determine its obligations to defend
and indemnify Mr. Durham for Mr. Sellers's claims in the state court action.3 Mr. Gardner was
not a defendant in Nationwide’s action for a declaratory judgment. Instead, the only defendants
were Ronald Sellers, Kimberly Sellers, and Steve Durham, d/b/a/ as S. Durham Contracting.
On August 6, 2012, the magistrate judge in Nationwide’s declaratory judgment action
entered a Report and Recommendation that Nationwide’s motion for default judgment against
Mr. Durham and Nationwide’s motion for summary judgment against Ronald and Kimberly
Sellers be granted. (Doc. 13-11). Then, the court entered a final judgment in Nationwide’s
declaratory judgment action, adopting and affirming the magistrate judge’s Report and
Recommendation and ordering that Nationwide “has no obligation to defend or indemnify either
of the defendants with reference to the subject matter of this action” and entering a default
judgment against Mr. Durham. (Doc. 13-12).
On October 3, 2012, Mr. Sellers, as assignee, filed a “motion to reopen bankruptcy case
for administrative relief” with the bankruptcy court. (Doc. 13-13).4 The bankruptcy court held a
hearing on Mr. Seller’s motion and requested briefing from counsel. After multiple extensions of
the briefing schedule, Mr. Sellers filed a motion to withdraw his motion to reopen Mr. Durham’s
bankruptcy. The bankruptcy court granted Mr. Seller’s motion to withdraw on August 8, 2013,
and the bankruptcy court never lifted the stay regarding Mr. Gardner’s claims against Mr.
Then, on October 3, 2013, Mr. Sellers, individually and as Mr. Gardner’s assignee, and
Mr. Durham jointly filed a motion for entry of a consent judgment in the state court action. (Doc.
13-16). The state court’s order entering judgment in Mr. Sellers’ favor for $250,000 provided:
This judgment is conditioned upon and subject to the following, as agreed
and submitted by the parties:
1. During the pendency of the Bankruptcy action, the plaintiff Ronald
Sellers moved for and obtained leave to pursue his claims against Durham to
the extent that insurance coverage was afforded those claims. The
enforcement of any judgment is limited to available insurance benefits by
order of the Bankruptcy Court. (Case 10-04049-BGC7, Doc. 24).
2. Gary Gardner and/or Gardner Builders sought leave to pursue
claims against Durham to the extent insurance was available and likewise
represented to the Court that such leave would not have any effect on the
Debtors [sic] discharge. The enforcement of any judgment is limited to
available insurance benefits. (Case 10-04049-BGC7, Doc. 28 and 52.)
The court notes that Mr. Sellers has not contested several of Nationwide’s purported
uncontested facts. Accordingly, when Nationwide has asserted a fact that is supported by the record
and Mr. Sellers has failed to address it, the court has considered that fact undisputed for the purposes
of this opinion. See Fed. R. Civ. P. 56.
3. The Plaintiff herein may not execute on the judgment against Steve
Durham, individually or d/b/a S. Durham Contracting. The Plaintiff may
proceed against any available insurance policy insuring Durham pursuant to
Ala. Code 27-23-2 (1975), the Direct Action Statute, but shall not proceed
(Doc. 13-17 at 2).
Then Mr. Sellers, only in his capacity as Mr. Gardner’s assignee, filed this case against
Nationwide and Mr. Durham pursuant to Ala. Code § 27-23-2, the Alabama Direct Action
statute, seeking a judgment to be entered against Nationwide in the amount of $250,000.5
Nationwide then removed the case to this court.
STANDARD OF REVIEW
Summary judgment allows a trial court to decide cases when no genuine issues of
material fact are present and the moving party is entitled to judgment as a matter of law. See Fed.
R. Civ. P. 56. When a district court reviews a motion for summary judgment, it must determine
two things: whether any genuine issues of material fact exist, and whether the moving party is
entitled to judgment as a matter of law. Id.
The moving party “always bears the initial responsibility of informing the district court of
the basis for its motion, and identifying those portions of ‘the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any,’ which it believes
Although Ronald Sellers and Kimberly Sellers were parties to both the state court case and
the declaratory judgment action, Ronald Sellers, as the assignee of Mr. Gardner, is the only plaintiff
in this case.
demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S.
317, 323 (1986) (quoting Fed. R. Civ. P. 56).
Once the moving party meets its burden of showing the district court that no genuine
issues of material fact exist, the burden then shifts to the non-moving party “to demonstrate that
there is indeed a material issue of fact that precludes summary judgment.” Clark v. Coats &
Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991).
In response, the non-moving party “must do more than simply show that there is some
metaphysical doubt as to the material fact.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 586 (1986). The non-moving party must “go beyond the pleadings and by [its] own
affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file,’ designate
‘specific facts showing that there is a genuine issue for trial.’” Celotex, 477 U.S. at 324 (quoting
Fed. R. Civ. P. 56(e)) (emphasis added).
The court must “view the evidence presented through the prism of the substantive
evidentiary burden,” to determine whether the non-moving party presented sufficient evidence on
which a jury could reasonably find for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 255 (1986). The court must refrain from weighing the evidence and making credibility
determinations because these decisions belong to a jury. See Anderson, 477 U.S. at 254.
Further, all evidence and inferences drawn from the underlying facts must be viewed in
the light most favorable to the non-moving party. See Graham v. State Farm Mut. Ins. Co., 193
F.3d 1274, 1282 (11th Cir. 1999). After both parties have addressed the motion for summary
judgment, the court must grant the motion only if no genuine issues of material fact exist and if
the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56.
The clerk of court is authorized to enter default against a party who has failed to plead or
otherwise defend. Fed. R. Civ. P. 55(a). After default has been entered, a plaintiff may move for
a default judgment against the defaulted defendant. Fed. R. Civ. P. 55(b). Default alone does not
warrant a default judgment; the pleadings must set forth a sufficient factual basis for judgment to
be entered against the defendant. See Surtain v. Hamlin Terrace Found., 789 F.3d 1239, 1245
(11th Cir. 2015).
Effect of Bankruptcy Discharge on Mr. Gardner's Claims
Nationwide argues that it cannot be liable to Mr. Sellers because Mr. Gardner's claims
were discharged in Mr. Durham's bankruptcy proceeding. However, the “discharge of a debt of
the debtor does not affect the liability of any other entity on . . . such a debt.” 11 U.S.C. § 524(e).
A bankruptcy discharge is meant to provide a “financial fresh start” to debtors, not a windfall for
insurance companies. See In re Jet Florida Sys., Inc., 883 F.2d 970, 972 (11th Cir. 1989); see
also Green v. Welsh, 956 F.2d 30, 33 (2d. Cir. 1992) (“Congress sought to free the debtor of his
personal obligations while ensuring that no one else reaps a similar benefit.”). A discharge
removes a debtor's personal liability, but it does not extinguish the underlying debt. Although a
creditor is prevented from pursuing Mr. Durham to collect on the debt, it may pursue a third
party who is also liable. Therefore, the discharge of Mr. Durham's personal liability for his debts
does not affect Nationwide's potential liability for those obligations.
Validity of the Consent Judgment
Mr. Sellers, as Mr. Gardner’s assignee, brought this case pursuant to Alabama’s Direct
Action statute, Ala. Code § 27-23-2. The statute provides:
Upon the recovery of a final judgment against any person, firm, or corporation by any
person . . . for loss or damage to property, if the defendant in such action was insured
against the loss or damage at the time when the right of action arose, the judgment
creditor shall be entitled to have the insurance money provided for in the contract of
insurance between the insurer and the defendant applied to the satisfaction of the
judgment, and if the judgment is not satisfied within 30 days after the date when it
is entered, the judgment creditor may proceed against the defendant and the insurer
to reach and apply the insurance money to the satisfaction of the judgment.
Ala. Code § 27-23-2.
Under Alabama law, “an injured party cannot bring a direct action against the insurance
carrier, absent a final judgment against its insured.” S. Pioneer Prop. & Cas. v. Bennett, 2010
WL 1416123 (M.D. Ala. Apr. 7, 2010) (citing Maness v. Alabama Farm Bureau Mut. Cas. Ins.
Co., 416 So. 2d 979, 981–82 (Ala. 1982)).
Section 524(a) clarifies that the discharge of a debtor does not affect the liability of a third
party, but it does not serve as a basis for an independent cause of action. See Grant v.
Progressive Ins. Co., 535 F. Supp. 2d 296, 299 (D. Conn. 2008) (“§ 524(e) does not itself
provide a cause of action . . .”). Therefore, Mr. Sellers's ability to bring this suit is premised on
the validity of the Alabama state court judgment in Sellers v. Durham. (Doc. 17).
Nationwide argues that Mr. Durham's discharge in the bankruptcy proceeding voids the
judgment. See 11 U.S.C. § 524(a)(1) (“A discharge . . . voids any judgment at any time obtained,
to the extent that such judgment is a determination of the personal liability of the debtor with
respect to any debt discharged.”). Nationwide also argues that the judgment is based on the false
premise that Mr. Gardner had the leave of the bankruptcy court to pursue his claim against Mr.
Durham, and therefore is invalid.
Section 524(a) does not void the judgement. The statute “does not preclude the
determination of the debtor's liability upon which the damages would be owed by another party,
such as the debtor's liability insurer.” In re Jet, 883 F.2d at 973. The permanent injunction
against collection actions applies “only with respect to the personal liability of the debtor” and so
creditors are not precluded from “commenc[ing] a suit against a debtor . . . to establish liability
of another.” Id. Therefore, Mr. Sellers and Mr. Gardner were not barred by the permanent
injunction from seeking to establish Mr. Durham's liability to them in state court to invoke
recovery from Nationwide.
Nationwide puts great emphasis on the procedural posture of In re Jet and other similar
cases, noting that the appellate courts were reviewing decisions of the bankruptcy court to grant
relief from the permanent injunction. Accordingly, Nationwide claims In re Jet “stands for the
proposition that Plaintiff must make necessary filings and may obtain relief from the permanent
injunction . . . in the bankruptcy court.” (Doc. 18 at 3) (emphasis omitted).
But In re Jet does not state–or even imply–such a rule. On the contrary, the Eleventh
Circuit's broad language cannot be squared with Nationwide's narrow reading. In In re Jet, the
Eleventh Circuit did not find that the bankruptcy court should have granted the motion to vacate
the injunction. Rather, it found that the injunction did not apply to the creditor's nominal claim
against the debtor–that is the holding of In re Jet. In re Jet does not say that a plaintiff may
proceed against a debtor to establish the liability of a third party only with the leave of a
bankruptcy court–it says that a plaintiff may nominally proceed against the debtor. See In re Jet,
883 F.2d at 976 (“[A] plaintiff may proceed against the debtor simply in order to establish
liability as a prerequisite to recover from another, an insurer, who may be liable.”). The
procedural differences Nationwide notes do not make a legal difference.
The principle that § 524(a) does not bar a third-party creditor from proceeding nominally
against a debtor is widely embraced by Circuit Courts across the country, as evidenced by
another case on which Nationwide relies. See Matter of Edgeworth, 993 F.2d 51, 54 (5th Cir.
1993) (“Most courts have held that the scope of a section 524(a) injunction does not affect the
liability of liability insurers and does not prevent establishing their liability by proceeding against
a discharged debtor.”).
Why then do some creditors seek relief from the stay or injunction to nominally pursue
the debtor to establish the liability of a third-party? Out of an abundance of caution. See In re
Patterson, 297 B.R. 110, 114–16 (Bankr. E.D. Tenn. 2003) (noting that bankruptcy courts often
grant such motions “to provide the moving party with the security of an order”). Seeking relief
from the stay or injunction in the bankruptcy court may provide a party desired assurance, but it
is not, as Nationwide suggests, a procedural prerequisite to proceeding nominally against a
debtor to establish the liability of a third-party. The fact that the bankruptcy court never granted
Mr. Gardner (or Mr. Sellers as Gardner's assignee) leave to pursue his claims against Mr.
Durham is immaterial as to whether Mr. Sellers may now nominally pursue those claims against
Mr. Durham to establish Nationwide's liability.
Nationwide also argues that the consent judgment is “based on the false premise” that the
bankruptcy court had granted leave for Mr. Gardner's claims against Mr. Durham to be pursued
in state court. (Doc. 18 at 6). But all the state court order said was that Mr. Gardner “sought leave
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to pursue claims against Mr. Durham.” (Doc. 13-7 at 2). The order does not say Mr. Gardner
obtained relief to do so. In contrast, a mere paragraph earlier, the court stated that the Mr. Sellers
had “moved for and obtained leave.” Id. Clearly, the state court recognized the different
procedural postures of each of the claims in bankruptcy court and memorialized them in its order.
The judgment was not based on a false premise, but an accurately recitation of the correct
procedural posture of all previous proceedings.
Effect of Declaratory Judgment on Mr. Gardner's Claims
Finally, Nationwide argues that Mr. Sellers is attempting to “circumvent the prior judicial
determinations regarding the lack of coverage for the alleged property damage or the application
of coverage exclusions.” (Doc. 18 at 4). Nationwide substantively raises this argument for the
first time in its Reply Brief. Although Nationwide mentions the declaratory judgment action in
setting out the facts of its motion for summary judgment, it never argues that the judgment in that
case precludes Mr. Sellers's efforts in this litigation. See Brown v. CitiMortgage, Inc., 817 F.
Supp. 2d 1328, 1332 (S.D. Ala. 2011) (“[I]t is improper for a litigant to present new arguments in
a reply brief.”). Because Nationwide failed to advance this argument in its original motion, the
court should disregard it.
However, even when considered on the merits, Nationwide's argument fails. As a
preliminary matter, the court notes that Nationwide does not specify whether its argument is that
Mr. Sellers is barred by issue preclusion, claim preclusion, or both. However, claim preclusion
clearly does not apply. Even if the court assumes that Mr. Sellers would be considered the same
party, even though he appeared in the actions in different capacities in the two actions, Mr.
Sellers did not acquire rights to Mr. Gardner's claim until after the declaratory judgment action.
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Mr. Sellers could not have brought Mr. Gardner's claims as a counterclaim in the action. As such,
claim preclusion does not apply. See Davila v. Delta Air Lines, Inc., 326 F.3d 1183, 1187 (11th
Cir. 2003) (noting that a party is precluded from bringing a claim “that could have been raised
previously” in a subsequent action).
The court now considers whether Mr. Sellers is precluded from re-litigating the issue of
Nationwide's obligations under the insurance policy issued to Mr. Durham. Because the
declaratory judgment was entered by a federal court, federal principles of issue preclusion apply.
See In re St. Laurent, 991 F.2d 672, 676 (11th Cir. 1993), as corrected on reh'g (June 22, 1993).
For issue preclusion to apply, four elements must be met: (1) the same issue must have been
raised in the prior action; (2) it must have been actually litigated; (3) the determination of that
issue must have been essential to the judgment reached; and (4) the party to be precluded must
have had a full and fair opportunity to litigate the issue. See CSX Transp., Inc. v. Bhd. of Maint.
of Way Employees, 327 F.3d 1309, 1317 (11th Cir. 2003).
The declaratory judgment action and this case do not involve the same issues. Nationwide
asks the court to preclude Mr. Gardner's claims because they involve the same “gravamen” as
Mr. Sellers's claims which were adjudicated in the prior declaratory judgment action. But the
issues are materially different in at least two ways.
First, the issues of Nationwide's liability to Mr. Gardner and duty to defend Mr. Durham
from Mr. Gardner's claims were not litigated in the declaratory judgment action. In the
declaratory judgement action, the court found that Nationwide had no duty to defend Mr.
Durham or indemnify Mr. Sellers for defects in Mr. Durham's construction work. Because Mr.
Gardner was not a party to the declaratory judgment action, the court did not address
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Nationwide's liability to Mr. Gardner or its duty to defend Mr. Durham from Mr. Gardner's
claims. Put simply, the declaratory judgment states that Durham's Nationwide policy does not
provide coverage for the Sellerses's claims and that Nationwide no duty to defend Mr. Durham
from the Sellerses's claims; the judgment says nothing about Nationwide's obligation to defend
Mr. Durham or its liability to Gardner for his claims.
Even assuming that the underlying facts of the claims were precisely identical, whether
the policy provided coverage for Mr. Gardner's claims is a separate question from whether the
policy provided coverage for the Sellerses's claims. See Hart v. Yamaha-Parts Distributors, Inc.,
787 F.2d 1468, 1474 (11th Cir. 1986) (finding no issue of law or fact adjudicated with respect to
an entity that was not a party to the suit). The nature of the relationship may affect the parties'
respective rights. Simply because an underlying fact may be the same–Mr. Durham constructed a
shoddy foundation–does not necessarily mean that the insurance policy covers the claims of each
party identically. Whether Nationwide's policy provides coverage for the Sellerses's claims and
whether it provides coverage for Mr. Gardner's claims are distinct issues.
In the cross complaint against Mr. Durham, Mr. Gardner alleged that Mr. Durham must
indemnify him for any liability he may have to Mr. Sellers. Nationwide seems to suggest that the
exclusions that prevented Nationwide from being liable to Mr. Sellers apply with equal force to
Mr. Gardner. But such a conclusion cannot be reached without further exposition of the
insurance contract. And even if the court were inclined to parse the insurance contract itself and
uncover whether the claims would be treated the same, it cannot do so because the policy has not
been provided to the court as an exhibit.
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Second, Mr. Sellers's and Mr. Gardner's claims are distinct in the types of claims they
allege. The cross complaint also alleges independent causes of actions against Mr. Durham,
including that Mr. Durham had a duty to warn Mr. Gardner directly about his defects, breached
his duty to Mr. Gardner to supervise and train his agents, and breached express and implied
warranties owed to Mr. Gardner. These claims–and whether they were covered under the
Nationwide policy–could not possibly have been adjudicated in the declaratory judgment action
because they are uniquely Mr. Gardner's claims, and Mr. Gardner's claims were not presented to
the court for declaratory judgment. Therefore, Mr. Sellers is not precluded from bringing this
Default Judgment Against Durham
Mr. Sellers has moved for a default judgment against Mr. Durham. (Doc. 20). The court
DENIES the motion at this time WITHOUT PREJUDICE. Because Mr. Durham is joined to
this action as an indispensable, nominal party and Mr. Sellers does not seek monetary damages
from him, the court does not believe default judgment is appropriate at this time.
The court DENIES Nationwide's Motion for Summary Judgment and DENIES
WITHOUT PREJUDICE Mr. Sellers's Motion for a Default Judgment against Mr. Durham.
DONE this the 27th day of September, 2016.
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KARON OWEN BOWDRE
CHIEF UNITED STATES DISTRICT JUDGE
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