Shelby v. Oak River Insurance Company

Filing 41

ORDER granting 23 motion for summary judgment. Signed on April 30, 2018, by Chief District Judge Greg Kays. (Law clerk)

IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF MISSOURI
WESTERN DIVISION
QUENTON SHELBY, Individually
and on Behalf of Others Similarly Situated,
Plaintiff,
v.
OAK RIVER INSURANCE COMPANY,
Defendant.

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No. 4:17-cv-0224-DGK

ORDER GRANTING SUMMARY JUDGMENT
This lawsuit is an attempt to recover on an uncontested judgment entered in state court.
This dispute originated in a separate lawsuit (“the underlying litigation”) brought by a used car
dealer, Miller Investment Group (“MIG”), against Plaintiff Quenton Shelby (“Shelby”) for a
deficiency on his secured car loan. In response to MIG’s suit, Plaintiff filed a class-action
counter-claim alleging MIG violated the UCC and engaged in a deceptive pattern in repossessing
cars. MIG subsequently entered into a class-wide settlement with Plaintiff and assigned any
claims it had against its insurers to Plaintiff and the other class members. Plaintiff subsequently
filed this lawsuit seeking to recover under insurance policies issued by Defendant Oak River
Insurance Company (“Oak River”) for a “garage business.”
Now before the Court is Oak River’s motion for summary judgment (Doc. 23). Holding
that Oak River owed no duty to defend or indemnify MIG because the underlying claims did not
stem from “garage operations,” the motion is GRANTED.
Summary Judgment Standard
A moving party is entitled to summary judgment “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a matter of

law.” Fed. R. Civ. P. 56(a). The nonmoving party may resist summary judgment by asserting
affirmative defenses, but it must support these defenses with specific facts. Hiland Partners GP
Holdings, LLC v. Nat’l Union Fire Ins. Co., 847 F.3d 594, 601 (8th Cir. 2017).
Undisputed Facts
For purposes of resolving this motion, the Court finds the material, undisputed facts to be
as follows. 1 The Court acknowledges the parties submitted numerous other facts which are
relevant to Oak River’s many arguments concerning summary judgment. Because the Court
holds Oak River’s first argument is dispositive, it includes only those facts relevant to its first
argument.
The Policies
Oak River issued a series of Commercial Garage Liability Policies to MIG from 2008 to
2013 (“the Policies”). The policy terms at issue in this litigation are the same in all of the
Policies.
The Declarations page of the Policies accurately described MIG’s business as a used car
dealer. The Insuring Agreement stated that Oak River will “pay all sums an ‘insured’ legally
must pay as damages because of ‘bodily injury’ or ‘property damage’ . . . caused by an ‘accident’
and resulting from ‘garage operations’ . . .”
The Policies defined “garage operations” as:
the ownership, maintenance, or use of locations for garage
business and that portion of the roads or other accesses that adjoin
these locations. “Garage operations” includes the ownership,
maintenance or use of the “autos” indicated in Section I of this
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The Court has limited the facts presented here to those that are not in dispute and relevant to its disposition of the
motion. The Court has excluded legal conclusions, argument presented as fact, and proposed facts that are not
properly supported by admissible evidence. See Fed. R. Civ. P. 56(c); L.R. 56.1(a). The Court has included
reasonable inferences from material facts not in dispute and proposed facts the opposing party has not controverted
properly.

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coverage form as covered “autos.” “Garage operations” also
include all operations necessary or incidental to the performance of
“garage operations.”
The Underlying Litigation
MIG is a used car dealer with locations in Kansas and Missouri which also finances
purchases for its customers. MIG sells used cars to many customers by having the customer
enter into a retail installment contract and security agreement.
Shelby purchased a car from MIG and entered into a form retail installment contract and
security agreement for that purpose (“the security agreement”). Shelby allegedly failed to make
payments as required under the security agreement, and so MIG accelerated Shelby’s payments,
repossessed the car, and initiated the underlying litigation against Shelby seeking the deficiency
balance.
In response, Shelby filed a one count class action counterclaim against MIG alleging that
MIG failed to comply with the UCC.

The counterclaim specifically alleged that after

repossessing his car, MIG sent Shelby and numerous other class members presale notices, a/k/a
notices of sale, that did not comply with the UCC adopted by each class member’s state. 2 The
counterclaim primarily concerned the presale notices, 3 although it included other UCC

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The counterclaim also alleged the notices of sale failed to include an accounting of the alleged deficiency; failed to
include contact information for the debtor to use to obtain more information about the sale; failed to disclose the
amount MIG received at the sale; failed to properly describe potential liability for deficiency; failed to state the
amount necessary to redeem the collateral; and failed to properly identify the debtor. It also contended the notices
failed to provide an accounting of the unpaid indebtedness and to state the charge, if any, for such accounting; failed
to list the address or telephone number for the debtor to call or write if they needed more information about the sale;
failed to properly provide a “description of any liability for a deficiency” after sale because the notice did not
specify that the money MIG received from the sale of the collateral (after paying costs) would reduce the amount
they owed and that if the sale proceeds exceeded the loan balance that MIG would pay the surplus to the debtor;
failed to properly describe the debtor because it did not list the debtor’s address; and misstated the amount necessary
to redeem the collateral. Finally, the counterclaim alleged the notices of sale were not “reasonably authenticated.”
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It stated, “The principal legal question common to Shelby and each class member is whether the presale notices,
including Notice of Sale, sent by MIG . . . complied with the UCC;” “[t]he violation alleged by Shelby and the class
derives from written form presale notices that fail to comply with the UCC;” “Shelby and each member of the class
were damaged and are entitled to recover statutory minimum damages due to MIG’s failure to provide proper

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violations. The counterclaim did not contain any claim for negligence, 4 nor did it allege causes
of action for wrongful repossession, libel, slander, defamation, or invasion of privacy. The
counterclaim sought “statutory minimum damages in the amount provided by § 9-625(c)(2) of
the UCC,” damages equal to the “time price differential, delinquency and collection charges”
under § 365.145 Mo. Rev. Stat., and prejudgment interest. It also sought declaratory and
injunctive relief, including “[a] declaration that the presale notice sent by MIG to Shelby and the
class fails to comport with the provisions of the UCC.”
The state court certified a class consisting of all persons: (1) who were named borrowers
on a consumer loan or financing agreement with or assigned to MIG; (2) whose loan was secured
by collateral; (3) whose collateral was repossessed or voluntarily surrendered; and (4) whose
collateral was disposed of from January 10, 2008, to April 21, 2015.
On February 11, 2013, MIG forwarded the counterclaim to Oak River, along with other
documents from the underlying litigation.
Oak River’s Denial Letter
On March 15, 2013, Oak River sent MIG a letter advising that it was denying coverage
for the counterclaim. This denial letter stated the claims did not come within the definitions of
“accident,” “bodily injury,” and “property damage.” Also, the letter quoted language from the
Policies stating “[w]e will pay all sums . . . to which this insurance applies caused by an
‘accident’ and resulting from ‘garage operations,’” but it did not state Oak River was denying
coverage because the damages did not come within the definition of “garage operations.” The

presale notices under the UCC and MIG’s improper sales of repossessed collateral thereunder;” and “Shelby and
each member of the class will rely on the same basic evidence (i.e. the form presale notices.)”.
4

Shelby objects that this statement of fact calls for a legal conclusion. Given that the words “negligence” and
“negligent” (or their equivalents) do not appear anywhere in the counterclaim, it is a statement of fact that the
counterclaim does not assert a claim for negligence.

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closing paragraph of the letter cautioned, “reference to specific provisions of the Policies are not
a waiver of our rights under any other provision of the Policies,” and that, “Oak River may at any
time assert any of these additional rights or defenses.”
MIG did not respond to Oak River’s March 15, 2013 letter.

MIG defended the

underlying litigation at its own expense for three years before agreeing to settle. It did not
communicate with Oak River regarding the underlying litigation from March 15, 2013 to July
19, 2016.
The Class Action Settlement
On December 22, 2015, MIG and Shelby filed their Joint Motion for Preliminary
Approval of Class Action Settlement in the underlying litigation. The proposed settlement
agreement (“the Agreement”) required MIG to take various actions. Among other things, it
required MIG to agree that it:
. . . will not contest a judgment being entered against it in an
amount to be determined by the Court, comprising damages for
wrongful repossession, libel/slander/defamation, invasion of
privacy, and other uncertain or hard to quantify damages, plus prejudgment interest and post-judgment interest. Shelby will seek a
judgment equal to the statutory damages provided in § 9-625, the
time price differential (“finance charge”) paid by the Settlement
Class, plus prejudgment interest and post-judgment interest. The
judgment shall indicate only $450,000 may be satisfied from
MIG’s assets for its obligations required under this Agreement and
any remaining amount may only be satisfied from MIG’s insurance
policies in effect during the class period.
On March 4, 2016, MIG and Shelby appeared by counsel for a hearing on final approval
hearing of the class settlement. At the hearing, the court heard a summary of damages presented
by Shelby’s attorney. Through counsel, Shelby argued that “[MIG] admitted that the UCC
notices and other notices that they had sent were defective . . . So, based on those notices, the
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UCC provides a statutory formula for those damages.”

He asserted the damages totaled

$14,884,019.13, as follows:
§ 400.9-625 (“credit service charge damages”)

$8,144,020.71

§ 400.9-625 (10% of principal)

$2,183,597.14

§ 400.9-625 ($500 per defective notice)

$1,174,500.00

§§ 365.150 & 408.562 (time price differential)

$3,381,901.28

He argued that with pre-judgment interest on the statutory damages, the damages totaled
$4,117,776.03.

Shelby did not seek damages for wrongful repossession, libel, slander,

defamation, invasion of privacy, or other uncertain or hard to quantify damages.
Shelby’s proposed order approving the settlement, which the court entered, included the
following paragraph:
6. Damages. MIG agreed not to contest a judgment being entered
against it in an amount to be determined by the Court. The Court
determines the Settlement Class has compensatory damages of
$19,001,795.17 resulting from MIG’s negligent conduct in failing
to send notices complying with Missouri Chapter 408 and the
Uniform Commercial Code as part of operations necessary or
incidental to MIG’s garage business. MIG did not intend to violate
Chapter 408 or the UCC and did not intend injury to the class
because it believed its notices were accurate, lawful and contained
no misrepresentations. However, the negligent misrepresentations
in the notices were the proximate cause of the loss of the vehicles
because it precluded the Class members from reclaiming their
collateral before it was sold. Mancuso v. Long Beach Acceptance
Corp., 254 S.W.3d 88, 92 (Mo. App. 2008) (purpose of notice is to
allow consumer to reclaim collateral).
The negligent
misrepresentations in the notices were also the proximate cause of
the loss of use of the: (a) Class member’s surplus funds owed them
after the sale of the collateral; and (b) the money each Class
member paid, which was barred by statute and common law.

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(Emphasis added.). The court entered judgment against MIG in the amount of $19,001,795.17,
the amount of statutory damages and pre-judgment interest sought by Shelby in the hearing. 5
Prior to entry of the judgment, the only legal theories for recovery that MIG had made
Oak River aware of were those set forth in the counterclaim. The first time Oak River became
aware that Shelby’s claims could possibly include negligence was in 2016, when it obtained a
copy of the judgment.
After settling the class action claims, MIG filed a legal malpractice suit against the
attorneys who drafted the pre-sale notices. MIG described Shelby’s counterclaim as seeking
“statutory damages related to the failure of the pre-sale notice to follow the requirements and
make the specific disclosures required under sections of the Uniform Commercial Code.” MIG
asserted that it “had no defense to the Counterclaim. The pre-sale notice provided by [its
attorneys] did not conform to the statutory requirements of the Uniform Commercial Code. The
Counterclaim was akin to ‘shooting fish in a barrel.’” MIG also asserted “[the attorneys’]
obvious malpractice left [MIG] with no choice but to enter into a Class Action Settlement, which
received court approval in March 2016.”
Shelby has now sued Oak River for breach of the duty to defend and equitable
garnishment, alleging that it breached its duty to defend MIG in the underlying litigation.
Discussion
Oak River moves for summary judgment on numerous grounds, primarily that: (1) MIG’s
claim did not result from “garage operations” under the Polices; (2) there was no coverage
because the damages are for UCC statutory damages, not for “bodily injury” or “property
damage;” (3) there was no “accident” as defined by the Policies; (4) the claims are excluded

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$14,884,019.13 (statutory damages) + $4,117,776.03 (pre-judgment interest) = $19,001,795.16. The parties agree
the $0.01 difference between these amounts is an immaterial mathematical error.

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under language concerning “expected or intended injury” an “loss of use” of property damaged
by an insured’s failure to perform a contract or agreement; (5) Oak River was never given notice
of any claim alleging negligence; (6) even if it had been, negligent conduct in failing to send
notices complying with Missouri law was not part of MIG’s “garage operations;” and (7) even if
coverage were available, recovery is limited to $1,000,000 under the Policies.
The Court holds Oak River’s argument concerning “garage operations” is dispositive and
does not address its remaining arguments.
I.

Oak River owed no duty to defend or indemnify MIG because the underlying claim
did not result from “garage operations.”
The Polices cover “bodily injury” or “property damage” caused by an “accident”

resulting from “garage operations.”

“Garage operations” is defined as “the ownership,

maintenance, or use of locations for garage business and that portion of the roads or other
accesses that adjoin these locations,” including “all operations necessary or incidental to the
performance of garage operations.” In construing the terms of an insurance policy, a court
applying Missouri law gives the term the meaning which an ordinary person of average
understanding who is purchasing insurance would attach to the language, and resolves
ambiguities in favor of the insured. Burns v. Smith, 303 S.W.3d 505, 509 (Mo. 2010). “Garage
operations” as used in the Policies covers a variety of activities, such as repairing cars, test
driving cars, and parking cars, but it does not include UCC violations or repossession activities.
These acts relate to financing, not garage operations. Thus the Policies do not cover—indeed,
could not possibly cover—the claims made against MIG in the underlying litigation.
This holding is supported by controlling Eighth Circuit caselaw. In Landers Auto Group
No. One, Inc. v. Continental Western Insurance Co., the Eighth Circuit held that nearly identical
policy language regarding garage operations did not cover an auto dealership’s losses arising
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from a lawsuit alleging wrongful repossession, conversion, and violations of the Arkansas
Deceptive Trade Practices Act. It reasoned that this activity was “not an activity associated with
operation of a garage but of the financing activities of the dealership.” 621 F.3d 810, 811-12,
814 (8th Cir. 2010). Other jurisdictions have reached the same conclusion.

See, e.g., N.

Carolina Farm Bureau Mut. Ins. Co. v. Weaver, 517 S.E.2d 381, 384 (N.C. Ct. App. 1999)
(holding forcible repossession of a car by repair shop employees does not fall within the
definition of “garage operations”).
Shelby’s claim that Oak River is estopped from raising this coverage defense is
unavailing. Shelby argues Oak River is estopped because its denial of coverage letter did not
assert that the damages did not come within the definition of “garage operations,” and MIG was
prejudiced because it detrimentally relied on the letter in “preparing to meet those issues and in
deciding to consent to a judgment against it.” Opp’n at 26 (Doc. 26).
Under Missouri law, an insurer which announces a specific defense to an insured’s claim
in a denial letter can be estopped from subsequently relying on an inconsistent theory if the
announcement “lulls” the insured into relying on the insurer’s statement to his detriment. Brown
v. State Farm Mut. Auto. Ins. Co., 776 S.W.2d 384, 388-89 (Mo. 1989). But an insurer is not
estopped from later asserting another defense to an insured’s claim so long as the insurer has not
made a statement excluding other defenses which the insured reasonably relied upon in preparing
the claim.

As the Eighth Circuit put it, estoppel applies “only where an insurer raised

inconsistent defenses and, by raising inconsistent defenses, caused prejudice to the insured.”
Cedar Hill Hardware & Const. Supply, Inc. v. Ins. Corp. of Hannover, 563 F.3d 329, 342 (8th
Cir. 2009) (emphasis added).

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In this case, Oak River has not asserted an inconsistent defense, nor has MIG been
prejudiced. The denial letter stated coverage did not exist because there was no “accident,”
“bodily injury,” or “property damage.” Subsequently, in this litigation, Oak River added to this
list of defenses by arguing that the claims also did not result from “garage operations.” Oak
River’s defense is not inconsistent with these. In fact, the addition of this defense is perfectly
consistent with the language in the denial letter cautioning that Oak River was not waiving its
rights “under any other provision of the Policies,” and that it might assert such rights at some
later time.
Even if this defense were somehow inconsistent with those claimed in the denial letter,
there has been no prejudice. Far from being caught flat-footed by Oak River’s defense, Shelby
was well aware of it.

Indeed, his attorneys attempted to thwart this potential defense by

including in the proposed order approving the settlement language describing the damages as
“compensatory” damages resulting from MIG’s “negligent conduct . . . as part of operations
necessary or incidental to MIG’s garage business.” Hence, Oak River is not estopped from
raising it.
Because the Court holds the claims in the underlying litigation do not result from “garage
operations,” there is no coverage under the Policies, and Oak River is entitled to summary
judgment.
Conclusion
Oak River’s motion (Doc. 23) is GRANTED.
IT IS SO ORDERED.
Date:

April 30, 2018

/s/ Greg Kays
GREG KAYS, CHIEF JUDGE
UNITED STATES DISTRICT COURT

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