Kuepers Construction, Inc. v. State Auto Insurance Company et al

Filing 47

MEMORANDUM OPINION AND ORDER overruling 44 APPEAL/OBJECTION OF MAGISTRATE JUDGE DECISION to District Judge; granting 3 Defendant's Motion to Dismiss; denying 11 Plaintiffs's Motion to Remand to State Court; granting 19 Defendant's Motion to Dismiss Cross-Claim. The Complaint 1 is DISMISSED (Written Opinion). Signed by Judge Ann D. Montgomery on 07/13/2015. (TLU)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Kuepers Construction, Inc. and Interlachen
Propertyowners Association, Inc.,
Plaintiffs,
v.

MEMORANDUM OPINION
AND ORDER
Civil No. 15-449 ADM/LIB

State Auto Insurance Company,
Defendant.

Jason Tarasek, Esq., Hammargren & Meyer, P.A., Bloomington, MN, on behalf of Plaintiffs.
Cheryl A. Hood Langel, Esq., McCollum Crowley Moschet Miller & Laak, Ltd., Minneapolis,
MN, on behalf of Defendant.

I. INTRODUCTION
On April 14, 2015, the undersigned United States District Judge heard oral argument on
Defendant State Auto Insurance Company’s (“State Auto”) Motion to Dismiss [Docket No. 3]
and Motion to Dismiss Cross-Claim [Docket No. 19] and Plaintiff Kuepers Construction, Inc.’s
(“Kuepers”) Motion to Remand [Docket No. 11]. On April 27, 2015, Magistrate Judge Brisbois
granted State Auto’s Motion for Realignment of the Parties [Docket No. 43] (“Realignment
Order”) and Kuepers subsequently objected [Docket No. 44] (“Objections”). For the reasons
stated herein, State Auto’s motions are granted, Kuepers’s motion is denied, and Kuepers’s
Objections to Judge Brisbois’s Realignment Order are overruled.
II. BACKGROUND1
A. Underlying State Court Action
In 1997, Kuepers Construction, a Minnesota corporation, began building a 24 unit

1

The facts summarized here are taken as alleged in the pleadings.

townhome project in Crow Wing County, Minnesota (the “Project”) in a development owned by
Interlachen Propertyowners Association (the “Association”), a Minnesota non-profit corporation.
Notice of Removal [Docket No. 1-1], Ex. A (“Compl.”) ¶¶ 1–4. Kuepers concluded construction
in 2001. Id. ¶ 5. Interlachen Properties LLC served as Kuepers’s real estate manager and
executed the sale of units to individual members of the Association. Id. ¶ 8. Kuepers maintained
several insurance policies with State Auto, an Ohio corporation. Id. ¶¶ 2, 14.
Between 2004 and 2009, Kuepers performed periodic repairs of the buildings’ siding. Id.
¶¶ 9–11. In 2010, the Association retained an expert to examine property damage at the Project.
Id. ¶ 12. The expert informed the Association of multiple issues with the Project, including that
the buildings’ siding, windows, weather resistive barriers, poly-vapor barriers, and insulation
were improperly installed. Id. The expert additionally found that the grading was improper, the
project failed to meet certain building codes, and that widespread design and engineering defects
contributed to the on-going issues at the property. Id.
As a result of the expert’s findings, the Association commenced an action against
Kuepers and Interlachen Properties LLC in Crow Wing County District Court. Id. ¶ 13. After
receiving notice of the lawsuit, Kuepers’s insurer, State Auto, retained counsel to defend against
the claims at trial. Id. ¶¶ 15–24. After discovering additional design defects, the Association
amended its complaint to bring additional claims for professional negligence and professional
negligent design. Id. ¶ 16. Kuepers brought a motion for summary judgment seeking dismissal
of the design negligence claim, and this motion was granted on January 4, 2013. Id. ¶ 17.
Interlachen Properties LLC’s motion for summary judgment was also granted on January 4,
2013. Notice of Removal in Interlachen Prop., LLC v. State Auto Ins. Co., 14-cv-4380

2

(JRT/LIB) [Docket No. 1-1], Ex. A ¶ 29.
Prior to trial of the remaining claims asserted against Kuepers, State Auto raised for the
first time several coverage defenses in a new reservations of rights letter, claiming that these
defenses limited or precluded Kuepers’s coverage for certain damages. Id. ¶¶ 21–22. Based on
the representations of the defense counsel retained by State Auto, Kuepers believed that its
interests were protected. Id. ¶¶ 22–25. Following a jury trial, judgment was entered in favor of
the Association against Kuepers in the amount of $2,147,000. Id. ¶¶ 26–28. The state court
required that Kuepers post a supersedeas bond for the same amount, or face attachment of its
assets to fulfill the judgment. Id. ¶ 29. State Auto’s retained counsel initially advised Kuepers
that it would post the supersedeas bond on Kuepers’s behalf; however, State Auto subsequently
refused to post the bond. Id. ¶¶ 30–31.
B. Miller-Shugart Agreements
In response to State Auto’s “abandonment” of Kuepers, on July 28, 2014, Kuepers
entered into a Miller-Shugart settlement agreement with the Association wherein Kuepers
stipulated to the entry of judgment against it in exchange for the Association agreeing to pursue
fulfillment of the judgment solely from State Auto (“Miller-Shugart agreement").2 Id. ¶¶ 37–45;
McCollum Aff. [Docket No. 6] Ex. 12. The Crow Wing County Court approved the settlement
agreement and entered judgment for the Association in the amount of $2,940,875.15, reflecting
the jury verdict amount and subsequent costs, disbursements, and interest. Id. ¶ 56; Tarasek
Decl. [Docket No. 14] Exs. C, D. It is this Miller-Shugart agreement that is the subject of the

2

Minnesota allows for a plaintiff-claimant and a defendant-insured to enter into a
settlement agreement which is only collectible from the insurer. See Miller v. Shugart, 316
N.W.2d 729 (Minn. 1982). Such agreements are known as “Miller-Shugart agreements.”
3

instant action.
In addition to the above referenced agreement, the Association entered into two
additional Miller-Shugart agreements. On August 28, 2014 the Association executed an
agreement addressing the design claims with Kuepers concerning the James River Insurance
Company (“James River”), Kuepers’s other insurer. McCollum Aff. Ex. 13. The parties in this
agreement stipulated to a judgment of $2,000,000. Id. James River commenced a declaratoryjudgment action in federal court against the Association and Kuepers related to this agreement.
Id. Ex. 6. That action is also assigned to the undersigned. See James River Ins. Co. v.
Interlachen Propertyowners Assoc,, 14-cv-3434 (ADM/LIB).
The Association also executed a third Miller-Shugart agreement on August 28, 2014 with
Interlachen Properties LLC as to State Auto. McCollum Aff. Ex. 14. Interlachen Properties
LLC thereafter commenced a declaratory judgment action in state court against the Association,
Kuepers, and State Auto. Id. Ex. 17. On October 17, 2014, State Auto removed that action to
federal court on the basis of diversity jurisdiction, asserting that Interlachen Properties LLC
fraudulently named Kuepers and the Association as Defendants. Id. Ex. C. This action (the
“Interlachen Properties LLC action”) was assigned to the Honorable John R. Tunheim. See
Interlachen Prop., LLC, 14-cv-4380 (JRT/LIB). On January 7, 2015, Judge Brisbois granted
State Auto’s Motion for Realignment and the parties were realigned so that Interlachen
Properties LLC, the Association, and Kuepers are named as plaintiffs and State Auto is the sole
defendant. Id. Ex. E. Interlachen Properties LLC’s Motion to Remand and Objection to Judge
Brisbois’s Realignment Order are currently pending before Judge Tunheim.
The total of the stipulated judgments in the three Miller-Shugart agreements is

4

$7,000,000.15. McCollum Aff. Exs. 12, 13, 14.
C. The Instant Action
Kuepers filed the instant action on December 3, 2014 in Crow Wing County District
Court. Compl. The action originally named State Auto and the Association as defendants and
asserts seven claims. Id. Count One seeks declaratory judgment against both State Auto and the
Association, alleging that State Auto breached its obligation to Kuepers under its insurance
policies and, as a consequence, State Auto must satisfy the $2,940,875.15 judgment entered
pursuant to the Miller-Shugart agreement between Kuepers and the Association. Id. ¶¶ 51–56.
The remaining counts are all asserted against State Auto based on its alleged failure to fulfill its
obligations under the insurance policies and post a supersedeas bond in the state court action.
These claims sound in breach of contract, breach of fiduciary duty, breach of the implied duty of
good faith and fair dealing, estoppel, waiver, and reimbursement of attorneys’ fees. Id. ¶¶
57–92. The Association subsequently filed a cross-claim against State Auto for declaratory
judgment and garnishment and a counterclaim against Kuepers for garnishment. Def.
Interlachen Prop. Assoc., Inc.’s Answer, Cross-Cl., and Countercl. [Docket No. 10] ¶¶ 42–52.
On February 5, 2015, State Auto removed this case to federal court based on diversity of
citizenship. Notice of Removal ¶ 4. In its notice of removal, State Auto claimed that the
Association had been fraudulently joined as a defendant in an attempt to defeat federal diversity
jurisdiction. Id. After the case’s removal, State Auto filed Motions to Dismiss Kuepers’s claims
and the Association’s cross-claims. Additionally, Kuepers filed a Motion to Remand the action
back to state court.
On April 16, 2015, two days after this Court heard oral argument on State Auto’s

5

Motions to Dismiss and Kuepers’s Motion to Remand, Magistrate Judge Leo L. Brisbois heard
State Auto’s Motion for Realignment. Min. Entry [Docket No. 42]. State Auto argued that the
Association should be realigned as a plaintiff in this action “to reflect the parties’ actual
interests.” State Auto’s Mot. for Party Realignment [Docket No. 33]. Judge Brisbois granted
State Auto’s Motion on April 27, 2015. See Realignment Order.
III. DISCUSSION
A. Motion for Party Realignment
As noted above, State Auto removed this action to federal court claiming actual diversity
based on the fraudulent joinder of the Association as a defendant. Kuepers filed its Motion to
Remand on February 26, 2015. At that time, State Auto had yet to move for realignment and
Kuepers remained the sole Plaintiff in this action. In its Motion to Remand, Kuepers argues that
State Auto’s fraudulent joinder argument is meritless, and therefore the Court lacks subject
matter jurisdiction because complete diversity of citizenship between the parties does not exist.
While the remand issue was pending, Judge Brisbois granted State Auto’s motion for
realignment. Accordingly, the Association was realigned as a co-plaintiff, leaving State Auto as
the sole defendant and ensuring complete diversity in the action. Kuepers now objects to Judge
Brisbois’s Order.
1. Standard
A district court judge will not modify or set aside a magistrate judge’s ruling on a
nondispositive matter unless the ruling is clearly erroneous or contrary to law. D. Minn. LR
72.2(a); see also 28 U.S.C. § 636(b)(1)(A). A decision is “clearly erroneous” when, although
some evidence supports it, “the reviewing court on the entire evidence is left with the definite

6

and firm conviction that a mistake has been committed.” Chakales v. Comm’r of Internal
Revenue, 79 F.3d 726, 728 (8th Cir.1996) (citation omitted). “A decision is ‘contrary to law’
when it fails to apply or misapplies relevant statutes, case law or rules of procedure.” Knutson v.
Blue Cross & Blue Shield of Minn., 254 F.R.D. 553, 556 (D. Minn. 2008) (citation and quotation
omitted). Courts in this district have characterized this standard of review as “extremely
deferential.” Reko v. Creative Promotions, Inc., 70 F. Supp. 2d 1005, 1007 (D. Minn. 1999).
2. Jurisdiction to Consider Motion for Realignment
Kuepers first argues that State Auto’s Motion for Realignment was not properly before
Judge Brisbois. According to Kuepers, because State Auto removed this action on the basis of
fraudulent joinder, the Court only has limited temporary jurisdiction to make a determination
solely on whether the non-diverse defendant, in this case the Association, was indeed
fraudulently joined. Kuepers therefore contends that Judge Brisbois erred in ruling on the
Motion for Realignment prior to this Court issuing a decision on Kuepers’s Motion to Remand,
which would necessarily resolve the issue of whether the Association was fraudulently
joined—which in turn controls diversity jurisdiction. State Auto responds that if the Court has
jurisdiction to consider fraudulent joinder, it implicitly also has jurisdiction to consider
realignment because “both require the Court to address the same basic issue.” State Auto’s
Resp. to Pl.’s Objection to Ord. for Realignment [Docket No. 46] (“Response to Objections”) 3.
Kuepers cites to Filla v. Norfolk S. Ry. Co., 336 F.3d 806 (8th Cir. 2003) and Murphy v.
Aurora Loan Servs., LLC, 699 F.3d 1027 (8th Cir. 2012), for the proposition that when a nondiverse defendant has been joined and a party removes based on diversity under 28 U.S.C. §
1441(b), the court only maintains temporary jurisdiction to decide whether the non-diverse

7

defendant was fraudulently joined. However, as emphasized by Judge Brisbois, neither Filla nor
Murphy explicitly address the issue of whether a court may consider the alignment of parties
separate from the issue of fraudulent joinder. Critically, maintaining jurisdiction to consider an
issue of realignment prior to determining whether diversity jurisdiction is present appears to be a
common practice in many federal courts. See e.g., Chi., R.I. & P.R. Co. v. Stude, 346 U.S. 574,
578 (1954) (first realigning a non-resident defendant before determining that remand was
proper); City of Vestavia Hills v. Gen. Fid. Ins. Co., 676 F. 3d 1310, 1314 (11th Cir. 2012)
(finding that the district court did not err in realigning a named defendant as a plaintiff before
concluding that complete diversity was present); Lott v. Scottsdale Ins. Co., 811 F. Supp. 2d
1220, 1223 (E.D. Va. 2011) (collecting cases and stating that “[t]he first question
presented—whether post-removal party alignment to create diversity is permissible—is easily
answered in the affirmative based on settled authority in this circuit and elsewhere”); Hidey v.
Waste Sys. Int’l, Inc., 59 F. Supp. 2d 543, 545–46 (D. Md. 1999) (realigning parties and then
determining that diversity jurisdiction existed to support removal); but see Huntsman Corp. v.
Int’l Risk Ins. Co., 08-1542, 2008 WL 4453170, at *6 (S.D. Tex. Sept. 26, 2008) (“[W]hile there
is authority supporting both the proposition that realignment may be used to satisfy diversity
jurisdiction in removed actions and the proposition that realignment is not appropriate when
diversity was not present when the action was removed, the trend in this circuit disapproves of
using realignment after removal to cure a defect in removal jurisdiction.”).
At least one other court within the Eighth Circuit has first considered realignment of the
parties in the context of a motion for remand before then examining the issue of fraudulent
joinder. In JBB Invs. LLC v. Fazoli’s Franchising Sys. LLC, the plaintiffs moved for remand

8

based on a lack of complete diversity. No. 8-3, 2008 WL 2568468, *2 (E.D. Ark. June 25,
2008). A defendant responded that another non-diverse defendant should be realigned as a
plaintiff. Id. The court first evaluated this realignment argument and concluded realignment of
the non-diverse defendant was not warranted. Id. at *3. Only after this determination did the
court turn to the issue of whether the non-diverse defendant was fraudulently joined. Id. at *4.
The court ultimately found that no fraudulent joinder occurred and remand was therefore proper.
Id.
Given the precedent in multiple federal districts where courts have examined realignment
of the parties before determining whether removal based on diversity was warranted, Judge
Brisbois’s decision to rule on the Motion to Realign prior to this Court deciding Kuepers’s
Motion to Remand was not clearly erroneous.
3. Adversity of the Parties
The Court next turns to the gravamen of Kuepers’s objection—that there is no legitimate
basis for the Association’s realignment as a plaintiff.
Alignment of the parties in a complaint is not conclusive in determining whether
diversity of citizenship exists. Universal Underwriters Ins. Co. v. Wagner, 367 F.2d 866, 870
(8th Cir. 1966). Rather, a federal court is obligated to “look beyond the pleadings, and arrange
the parties according to their sides in the dispute.” City of Indianapolis v. Chase Nat’l Bank of
City of N.Y., 314 U.S. 63, 69 (1941) (quotation omitted). When examining whether realignment
is appropriate, courts generally look to whether “parties with the same ultimate interests in the
outcome of the action are on the same side.” JBB Invs. LLC, 2008 WL 2568468 at *3
(quotations omitted). “In the Eighth Circuit, to determine whether to realign [ ] defendants as

9

plaintiffs, the Court must decide whether any actual and substantial conflict exists between [the]
defendant and [the plaintiff], regardless of whether it concerns the primary issue in dispute.” PW
Shoe Lofts, LP v. State Auto Prop. & Cas. Ins. Co., No. 10-2241, 2011 WL 2295068, at *4 (E.D.
Mo. June 7, 2011) (citing Universal Underwriters Ins. Co., 367 F.2d at 870; Hartford Accident &
Indem. Co. v. Doe Run Res. Corp., No. 8-1687, 2009 WL 1067209, at *3 (E.D. Mo. Apr. 21,
2009)).
The Court agrees with Judge Brisbois’s conclusion that “the question of whether there
exists a substantial, actual conflict between [Kuepers and the Association] is readily and easily
resolved.” Realignment Order at 11. Kuepers pleads only one claim against the Association,
Count One for declaratory judgment regarding the parties’ rights under Kuepers’s insurance
policies with State Auto.3 However, at the time this action was filed, Kuepers and the

3

Even though this Count was pled against “all defendants,” the Court notes that it
actually is solely directed to State Auto:
53.

Kuepers is entitled to a declaratory judgment pursuant to Minnesota
Statutes Section 555, et seq. declaring the parties’ rights under the
Policies.

54.

Kuepers is entitled to a declaratory judgment that State Auto owed it a
defense in the Crow Wing County District Court matter styled The
Interlachen Propertyowners Association v. Kupers Construction, Inc.,
d/b/a Kuepers, Inc. And Interlachen Properties, LLC, et al., File No. 18CV-11-5-61 and that State Auto breached its contractual obligation to
defend.

55.

Kuepers is entitled to a declaratory judgment that State Auto owed Kupers
indemnification for the claims asserted in The Lawsuit and that State Auto
breached its contractual obligations of indemnity.

56.

Kuepers is further entitled to a declaratory judgment that, as a direct and
proximate result of State Auto’s breach of its contractual obligations, State
Auto has an immediate obligation to satisfy a judgment against Plaintiff in
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Association had already entered into the Miller-Shugart agreement whereby Kuepers stipulated
to the entry of judgment against it in the underlying construction litigation in exchange for the
Association’s assurance that it would move to collect the judgment solely from State Auto.
McCollum Aff., Ex. 12. Kuepers and the Association are not challenging the validity of the
Miller-Shugart agreement itself. Rather, both parties share the common interest of requiring
State Auto to satisfy the judgment in question.
As noted by Judge Brisbois, there is no risk that the Association and Kuepers will revert
to adverse positions, as can occur in actions where a Miller-Shugart agreement is declared
unenforceable. See Corn Plus Co-op. v. Cont’l Cas. Co., 516 F.3d 674, 682 (8th Cir. 2008).
Pursuant to the terms of their settlement, the Association agreed that it cannot revert and seek
fulfillment of the judgment from Kuepers, even in the event the Miller-Shugart agreement is later
found to be unenforceable, void, or unreasonable. See McCollum Aff., Ex. 12. Indeed, the
Eighth Circuit has upheld such waivers. Corn Plus Co-op., 516 F.3d at 682 (holding that it was
not appropriate to reinstate a claimant’s underlying tort claims against an insurer when the
parties entered into a Miller-Shugart agreement that included an explicit provision disallowing
the claimant to pursue collection against the insured in the event “for whatever reason, [the
claimant] is not successful in recovering against the [p]olicies on its claims.”).4

the amount of Two Million Nine Hundred Forty Thousand Eight Hundred
Seventy Five dollars and Fifteen cents ($2,940,875.15) entered by the
Crow Wing County District Court on August 11, 2014.
Compl. ¶¶ 51–56.
4

The Association did assert a counterclaim against Kuepers for garnishment. However,
this garnishment claim does not represent an actual or substantial conflict between the parties
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Both Kuepers and the Association seek the same outcome: State Auto paying the
$2,940,875.15 judgment in the state construction litigation. A further telling indication of the
parties’ aligned interest is that both parties are represented by the same counsel in this action.
As the Court discerns no actual or substantial conflict between Kuepers and the Association,
Judge Brisbois’s Order to Realign was not clearly erroneous. The Association’s realignment as a
plaintiff now properly reflects the Association’s true interest in this litigation.
4. Direct Action Under 28 U.S.C. § 1332(c)(1)(a)
Kuepers’s final objection contends that even if the parties were realigned in accordance
with Judge Brisbois’s Order, realignment still defeats diversity jurisdiction and therefore remand
is proper.5 Specifically, Kuepers states that if the Association were realigned as a plaintiff, 28
U.S.C. § 1332(c)(1)(a) mandates that State Auto be considered a resident of Minnesota. If State
Auto was deemed a Minnesota resident, the Court would be divested of subject matter
jurisdiction because complete diversity would not exist. In response, State Auto claims the
citizenship provision of § 1332(c)(1)(a) applies only to “direct actions” by an insured against an
insurer, and the instant lawsuit does not qualify as such an action.
Pursuant to the federal diversity jurisdiction statute, a corporation is deemed “a citizen of
any State by which it has been incorporated and of the State where it has its principal place of
business.” 28 U.S.C. § 1332(c)(1)(a). The statute further contains an exception related to “direct

because, as discussed, the Miller-Shugart agreement precludes such a claim.
5

Judge Brisbois noted in his Order that the realignment determination does not “require
the Court to address the effect of any realignment on subject matter jurisdiction” and, therefore,
he did not determine whether diversity was present in light of § 1332(c)(1)(a). Realignment
Order at 10. However, because Kuepers raised this argument in both its Objections and its
Motion to Remand, the implications of realignment on diversity will be addressed here.
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actions” involving insurers:
[I]n any direct action against the insurer of a policy or contract of liability
insurance, whether incorporated or unincorporated, to which action the insured is
not joined as a party-defendant, such insurer shall be deemed a citizen of [ ] every
State . . . of which the insured is a citizen.
Id. Kuepers argues that if the Association were realigned as a plaintiff, this lawsuit would
constitute a direct action against an insurer where the insured is not joined as a defendant. Under
Kuepers’s proposed application of the statute, realignment would defeat diversity jurisdiction as
the Plaintiffs (Kuepers and the Association) are citizens of Minnesota and the sole defendant
(State Auto) would likewise be deemed a Minnesota citizen.
Kuepers relies on Reko v. Creative Promotions, Inc., in support of its contention that
actions seeking to enforce Miller-Shugart agreements are “direct” pursuant to the diversity
statute. 70 F. Supp. 2d 998 (D. Minn. 1999). In Reko, the trustees of individuals who died in a
plane crash entered into a Miller-Shugart agreement with the tortfeasor when the tortfeasor’s
liability insurer refused to defend or provide coverage. Id. at 1000. The trustees subsequently
commenced a garnishment action in state court seeking to establish coverage and collect the
judgment, and the liability insurer subsequently removed. Id. Seeking remand, the trustees
argued that the federal court lacked diversity jurisdiction pursuant to § 1332(c)(1)(a). Id.
Evaluating the Minnesota garnishment statute in the context of a Miller-Shugart agreement, the
Magistrate Judge granted the motion for remand, concluding that the action constituted a “direct
action” within the meaning of § 1332(c)(1)(a). Id. at 1004.
The Reko court noted that § 1332(c) was amended in response to direct action statutes in
Louisiana and Wisconsin. Id. at 1002. These statutes permitted injured parties to sue a
tortfeasor’s insurer directly without joining the tortfeasor as a defendant, thereby enabling
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diversity jurisdiction in cases where the injured individual and the tortfeasor were residents of
the same state, but the tortfeasor’s insurer was considered a resident of a different state. Id. The
Magistrate Judge concluded that a Minnesota garnishment proceeding was a direct action:
Considering the purpose of 28 U.S.C. § 1332(c)(1), to prevent suit against an
insurer in a federal court when both the injured party and the insured are citizens
of the same state, even where several steps have to be taken before an injured
third party can directly sue the tortfeasor’s insurer, the result is the same. When
the injured party and insured are citizens of the same state, Congress has
expressed an intent that the insurer should not create diversity jurisdiction to
bring the case in federal court. To find that the Minnesota garnishment procedure
in the context of a Miller Shugart settlement is not a “direct action” within the
meaning of § 1332(c)(1), would defeat the Congressional intent.
Id. at 1004. This Court affirmed the Magistrate Judge’s Order. Reko, 70 F. Supp. 2d 1005.
Upon reexamination and further development of the case law, the Court no longer finds
the reasoning of Reko persuasive and therefore reverses course to join with a multitude of courts
in concluding that a suit brought against an insurer for the insurer’s independent wrongs is not
“direct” within the context of § 1332(c)(1)(a). See e.g., Beckham v. Safeco Ins. Co. of Am., 691
F.2d 898, 901–02 (9th Cir. 1982) (finding no “direct action” when the injured party “seek[s] to
impose liability on [the insurer] for [the insurer’s] own tortious conduct,” such as bad faith
refusal to settle claims and intentional and negligent infliction of emotional distress); Fortson v.
St. Paul Fire & Marine Ins. Co., 751 F.2d 1157, 1159 (11th Cir. 1985) (finding no “direct action”
where the injured party sued tortfeasor’s insurer based on insurer’s failure to settle in good
faith); Cunningham v. Twin City Fire Ins. Co., 669 F. Supp. 2d 624, 628–29 (D. Md. 2009)
(finding no “direct action” where the injured party sued insurer for insurer’s intentional
misrepresentation and tortious interference with contractual relations); Kelly v. State Farm Mut.
Auto Ins. Co., 764 F. Supp. 1337, 1339 (S.D. Iowa 1991) (finding no “direct action” where the

14

injured party brought suit against insurer for breach of duty of good faith and fair dealing).
Relying on the clear legislative history of the provision, these courts have “uniformly
defined the term ‘direct action’ as used in [§ 1332(c)(1)] as those cases in which a party
suffering injuries or damage for which another is legally responsible is entitled to bring suit
against the other’s liability insurer without joining the insured or first obtaining a judgment
against him.” Eltsefon v. State Farm Mut. Auto. Ins. Co, 826 F. Supp. 2d 922, 925 (E.D. Va.
2011) (quoting Beckham, 691 F.2d at 901–02). Simply because an injured party sues an insurer
does not automatically give way to the conclusion that the lawsuit is a “direct action.” Rather, to
constitute a “direct action” the action must arise out of the conduct of the tortfeasor. See
Fortson, 751 F.2d at 1159 (finding that a case is only a “direct action” where “the cause of action
against the insurance company is of such a nature that the liability sought to be imposed could be
imposed against the insured”). As noted by the Second Circuit, generally the “rule is that the
proviso does not affect suits against the insurer based on its independent wrongs: such as actions
brought against the insurer either by the insured for failure to pay policy benefits or by an injured
third party for the insurer’s failure to settle within policy limits or in good faith.” Rosa v.
Allstate Ins. Co., 981 F.2d 669, 675 (2d Cir. 1992).
The Eleventh Circuit’s City of Vestavis Hills v. General Fidelity Ins. Co. is particularly
instructive and relevant here. 676 F.3d 1310 (11th Cir. 2012). In that case, plaintiff Vestavis
Hills won a judgment in state court against tortfeasor Cameron Development Corporation
(“Cameron”), but Cameron’s insurer, defendant General Fidelity Insurance (“General Fidelity”)
subsequently denied coverage. Id. at 1312. Pursuant to a state statute, Vestavis brought an
action in state court to recover the judgment amount from General Fidelity, naming both General

15

Fidelity and Cameron as defendants. Id. General Fidelity removed to federal court, although
both Cameron and Vestavia were citizens of the same state. Id. The district court denied
Vestavia’s motion to remand for lack of diversity, realigning Cameron as a plaintiff on the basis
that both Vestavia Hills and Cameron had the shared interest of General Fidelity providing
coverage. Id. The Eleventh Circuit affirmed denial of the remand motion and found that
realignment did not result in a “direct action” as contemplated in 28 U.S.C. § 1332(c), stating
that “Vestavia Hills could not have brought this action against Cameron, as the single count
relates to insurance and Vestavia Hills has already obtained judgment against Cameron.” Id. at
1315.
Here, Kuepers asserted seven claims against State Auto: (1) declaratory judgment; (2)
breach of contract; (3) breach of fiduciary duty; (4) attorneys’ fees; (5) waiver; (6) estoppel; and
(7) breach of implied covenant of good faith and fair dealing. As in City of Vestavis Hills, the
claims are directed at the actions of the insurer, not the underlying liability of the tortfeasor.
Kuepers could not properly assert these claims independently against the insured Association
because they allege State Auto’s attempts to avoid payment under the policies and failure to
adhere to defense obligations in the underlying state court action. Kuepers and the Association
previously litigated the issue of tortfeasor liability in the state court action, resulting in the
$2,940,875.15 judgment against Kuepers and the subsequent Miller-Shugart agreement. “[I]t is
well-established that claims arising from an insurer’s independent actions during negotiations
with an injured third party, such as failure to settle within policy limits or in good faith, are not
‘direct actions’ under § 1332(c)(1).” Eltsefon, 826 F. Supp. 2d at 927 (citing Rosa, 981 F.2d at
675). Finally, and importantly, Kuepers is not even the injured party in this case, but rather the

16

insured tortfeasor. See Eltsefon, 826 F. Supp. 2d at 925 (defining a “direct action” as “an action
by an injured party against an insurer to recover for damages caused not by the insurer but by its
insured, who is not joined in the action”). These claims cannot be considered a direct action
within the meaning of § 1332(c)(1)(a) and therefore the realignment of the Association does not
defeat diversity.
B. Motion to Remand
Prior to Judge Brisbois’s ruling on realignment, Kuepers moved to remand. Kuepers
argued that this Court lacked subject-matter jurisdiction because the parties were not completely
diverse (with Kuepers and the Association both citizens of Minnesota) and that the Minnesota
Declaratory Judgment Act dictates that the Association be named in the suit. State Auto
countered that remand was not appropriate because the Association was fraudulently joined for
the sole purpose of defeating diversity jurisdiction. Judge Brisbois’s Realignment Order,
however, has since cured the jurisdictional concern in this case, ensuring complete diversity of
the parties.
Kuepers now posits that Judge Brisbois’s realignment allows for the unjust outcome of
State Auto sidestepping the fraudulent joinder issue. See Andalusia Enters, Inc. v. Evanston Ins.
Co., 487 F. Supp. 2d 1290, 1295 (N.D. Ala. 2007) (stating that the federal removal statute
“contemplates the determination of the question of removability using the lineup of the parties at
the time of removal, unless that lineup is facially improper”). Kuepers’s argument is unavailing.
Although Kuepers is correct in its assertion that the Minnesota Declaratory Judgment Act
required it to name the Association as an interested party in this action, the act does not mandate
that a party deemed indispensable under the statute must specifically be named as either a

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plaintiff or a defendant; that is, the statute does not dictate what side of the “v.” an indispensable
party should be placed on. See Minn. Stat. § 555.02. When evaluating the parties actual
underlying interests in this case, Judge Brisbois correctly concluded that the Association is more
aptly named as a plaintiff. Furthermore, as summarized above, with federal courts frequently
engaging in the practice of addressing realignment based on the parties’ interests prior to
evaluating remand, the Court cannot conclude that Judge Brisbois’s decision to rule on
realignment before this Court evaluated remand was clearly erroneous. There is now complete
diversity in this case. As such, the issue of remand based on lack of diversity is moot and the
Court need not engage in a fraudulent joinder analysis. Kuepers’s Motion to Remand is denied.
C. Motion to Dismiss
The Court next turns to State Auto’s Motion to Dismiss. State Auto argues that the
present action is duplicative of the earlier-filed Interlachen Properties LLC case pending before
Judge Tunheim. See Interlachen Properties LLC., 14-cv-4380 (JRT/LIB). Kuepers counters that
the instant case “involves a different settlement, different parties, different policy language and
different underlying facts” and therefore dismissal is inappropriate. Pl.’s Mem. Opp’n State
Auto’s Mot. Dismiss [Docket No. 27] 2. A careful examination of the issues and claims arising
in both actions compels the conclusion that this action is indeed duplicative or parallel to the
earlier-filed Interlachen Properties case. Therefore, this case will be dismissed.
Generally, federal courts have a “virtually unflagging obligation . . . to exercise the
jurisdiction given them.” Co. River Water Conserv. Dist. v. United States, 424 U.S. 800, 817
(1976). The Eighth Circuit, however, has articulated “a prudential limitation on the exercise of
federal jurisdiction” based on duplicity in multiple federal proceedings. Mo. ex rel. Nixon v.

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Prudential Health Care Plan, Inc., 259 F.3d 949, 953 (8th Cir. 2001). “Although no precise rule
has evolved with regard to the handling of instances where identical issues are raised in cases
pending in different federal courts, the general principle is to avoid duplicative litigation.”
Brewer v. Swinson, 837 F.2d 802, 804 (8th Cir. 1988) (citing Co. River, 424 U.S. at 817). As
such, in instances where federal courts are simultaneously exercising jurisdiction over the same
matter, one federal court may defer to another based on “considerations of ‘[w]ise judicial
administration, giving regard to conservation of judicial resources and comprehensive
disposition of litigation.’” Co. River, 424 U.S. at 817 (quoting Kerotest Mfg. Co. v. C–O–Two
Fire Equip. Co., 342 U.S. 180, 183 (1952)).6
The threshold issue in evaluating whether to abstain due to existing concurrent federal
litigation is “whether the proceedings are, in fact, duplicative.” Ritchie Capital Mgmt., L.L.C. v.
Jeffries, 849 F. Supp. 2d 881, 888 (D. Minn. 2012) (citing Brewer, 837 F.2d at 804). As stated
by the Eighth Circuit, “a plaintiff should not be allowed to litigate the same issue at the same
time in more than one federal court.” Blakley v. Schlumberger Tech. Corp., 648 F.3d 921, 932
(8th Cir. 2011) (quotations omitted); see also Mo. ex rel. Nixon, 259 F.3d at 954 (“Plaintiffs may
not pursue multiple federal suits against the same party involving the same controversy at the
same time.”). Complete identity between parallel actions is not required. Nat’l Indem. Co. v.
Transatl. Reins. Co., 13 F. Supp. 3d 992, 998 (D. Neb. 2014). Instead, “the crucial inquiry is one
of ‘substantial overlap’ between the parties and issues being litigated.” Id. (quoting Save Power

6

In its memorandum supporting the Motion to Dismiss, State Auto references both the
doctrines of res judicata and federal comity (or the “first-to-file” doctrine), stating that they are
the “most relevant” to the present situation. State Auto’s Mem. Supp. Mot. Dismiss [Docket No.
5] 8. The Court, however, believes that State Auto’s duplicity argument is better analyzed under
the general principles articulated here.
19

Ltd. v. Syntek Fin. Corp., 121 F.3d 947, 950-51 (5th Cir. 1997)).
Substantial overlap exists between the instant action and the Interlachen Properties LLC
case such that the litigation is duplicative and dismissal of this action is warranted. First, the
Court notes that all parties named in the instant lawsuit are likewise parties to the Interlachen
Properties LLC action. In arguing that dismissal is not appropriate, Kuepers emphasizes that the
parties in the corresponding actions are not identical. While Interlachen Properties LLC is not
named as a party to this lawsuit, this fact does not preclude a finding of duplicity. The interests
of the parties named here (Kuepers, the Association, and State Auto) will remain in play after
this case’s dismissal since they are named parties in the Interlachen Properties LLC action. In
other words, no party will be foreclosed of an opportunity to represent their interests in this
matter.
Furthermore, federal courts have found concurrent litigation in state courts involving
non-identical parties duplicative where the interests of non-identical parties are aligned. See
Samuels Grp., Inc. v. Hatch Grading & Contracting, Inc., 697 F. Supp. 2d 1042, 1051 (N.D.
Iowa 2010) (collecting cases). As stated in Section III.A.3 above, the interests of Interlachen
Properties LLC, the Association, and Kuepers are unquestionably aligned; these parties all seek
recovery from State Auto related to the underlying state court litigation.
Second, the Interlachen Properties LLC case arises out of the same factual background as
the present action. The Complaint in Interlachen Properties LLC includes a similar factual
overview of the underlying state court litigation. See generally Interlachen Properties LLC, 14cv-4380 (JRT/LIB), Compl. [Docket No. 1-1]. Additionally, the Interlachen Properties LLC
Complaint references both the Miller-Shugart agreement between the Association and

20

Interlachen Properties LLC (from which the Interlachen Properties LLC action arose) and the
Miller-Shugart agreement between the Association and Kuepers pertaining to indemnification
from State Auto (from which this action arose). Id. ¶¶ 43–44, 53–54. The Complaint also states
that both Miller-Shugart agreements originated in response to the common underlying state court
construction litigation. Furthermore, the cross-claims Kuepers asserted against State Auto in the
Interlachen Properties LLC action—now direct claims upon the parties’ realignment—pled facts
that are nearly identical in all material respects to those listed in the instant action.7
Third, substantial overlap exists in the actual claims pled by the parties in each action. In
its cross-claims against State Auto in the Interlachen Properties LLC action, Kuepers asserts four
of the same claims as it brings in the instant action: declaratory judgment, breach of contract,
attorneys’ fees, and breach of implied duty of good faith and fair dealing. See Def. Kuepers’s
Ans. Crosscl. Against State Auto [Docket No. 28], 14-cv-4380 (JRT/LIB). Kuepers now argues
that the claims in the Interlachen Properties LLC action cannot be considered duplicative
because “Kuepers’ amended cross[-]claim moots that concern.” Pl.’s Mem. Opp’n State Auto’s
Mot. Dismiss at 5. This argument has no merit. The “amended” cross-claims referred to by
Kuepers are currently only proposed claims as 21 days have passed since the claims were
originally asserted and Kuepers has neither moved the Court to amend nor obtained State Auto’s
permission to amended. In fact, State Auto denied Kuepers permission to amend “because the
amended cross-claims inexplicably changed Kuepers’s claims into Interlachen Properties’
claims.” Def. State Auto’s Reply Mem. Supp. Mot. Dismiss [Docket No. 30] 2. As Kuepers’s

7

The Complaint here contains slight wording adjustments compared to the cross-claims
in Interlachen Properties, as well as the addition of Paragraph 33.
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claims in the Interlachen Properties LLC action have yet to be amended and assert four of the
same claims brought in the instant action, the Court concludes that substantial overlap exists
between Kuepers’s claims in both actions.8 Furthermore, the counterclaim and cross-claims
asserted by the Association in the instant action will likewise remain at issue in the Interlachen
Properties LLC action. Here, the Association originally brought a counterclaim against Kuepers
for garnishment and cross-claims against State Auto for declaratory judgment and garnishment.
See Def. Association’s Ans. Cross-cl. and Countercl. [Docket No. 10]. These same claims were
asserted by the Association as cross-claims in the Interlachen Properties LLC action, and
therefore the Association’s interests will remain protected upon this case’s dismissal. See Def.
Association’s Ans., Cross-cl. and Countercl. [Docket No. 27], 14-cv-4380 (JRT/LIB).
Finally, the Court finds that “considerations of wise judicial administration” mandate
dismissal of the instant case. See Brewer, 837 F.2d at 804. In dismissing this action, the Court
will conserve judicial resources by preventing two federal judges from simultaneously
examining two actions arising from the same underlying facts to resolve substantially the same
issues between Kuepers and State Auto. The Court will likewise avoid a scenario where
piecemeal litigation could potentially produce inconsistent determinations regarding Kuepers’s
right to indemnification and defense coverage from State Auto. The Court cannot endorse a
course of action which would allow Kuepers to litigate the same issues involving the same
parties in front of two different judges within this district. This action is therefore dismissed.

8

Kuepers pled three claims against State Auto in the underlying action which were not
asserted in the Interlachen Properties LLC case; claims for breach of fiduciary duties, waiver,
and estoppel. A scheduling order has not been issued in the Interlachen Properties action and
thus no amended pleadings deadline has passed. Kuepers would therefore be free to move to
amend to add those claims which were not originally pled in the Interlachen Properties action.
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IV. CONCLUSION
Based upon the foregoing, and all of the files, records and proceedings herein, IT IS
HEREBY ORDERED that:
1.

Kuepers’s Motion to Remand [Doc. No. 11] is DENIED;

2.

Kuepers’s Objection to the Magistrate Judge’s Grant of Defendant State Auto
Insurance Company’s Motion for Realignment of the Parties [Doc. No. 44] is
OVERRULED;

3.

State Auto’s Motion to Dismiss [Doc. No. 3] is GRANTED;

4.

State Auto’s Motion to Dismiss Interlachen Propertyowners Association, Inc.’s
Cross-Claim [Doc. No. 19] is GRANTED; and

5.

Kuepers’s Complaint [Docket No. 1] is DISMISSED.

LET JUDGMENT BE ENTERED ACCORDINGLY.
BY THE COURT:

s/Ann D. Montgomery
ANN D. MONTGOMERY
U.S. DISTRICT JUDGE

Dated: July 13, 2015.

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