Donegal Insurance Group v. Innovations Windows & Siding, LLC et al.

Filing 32

MEMORANDUM AND ORDER - The plaintiff's motion to dismiss (filing 9 ) is granted. Defendants Mary Yelken and Phillip Kottmeyer's motion to dismiss (filing 16 ) is granted. The plaintiff's motion for default judgment (filing 29 ) is denied. This case is dismissed. A separate judgment will be entered. Ordered by Senior Judge John M. Gerrard. (Copy mailed) (MKR)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
DONEGAL INSURANCE GROUP,
Plaintiff,
vs.

4:23-CV-3092

INNOVATIONS WINDOWS &
SIDING, LLC, MARY YELKEN, and
PHILLIP KOTTMEYER,

MEMORANDUM AND ORDER

Defendants.
Innovations Windows & Siding, LLC, a Nebraska company, installed
windows in a home owned by Mary Yelken and Phillip Kottmeyer in Lincoln,
Nebraska. Donegal Insurance Group, a Pennsylvania company, is Innovations'
liability insurer. The homeowners allege that the windows were defectively
installed, and they sued Innovations in a Nebraska state court. Donegal
brought the present lawsuit prior to an imminent judgment in favor of the
homeowners in the state court lawsuit. Filing 5. The homeowners filed a
counterclaim against Donegal. Filing 8.
This matter is before the Court on Donegal's motion for default judgment
against Innovations (filing 29), Donegal's motion to dismiss the counterclaim
for lack of standing (filing 9), and the homeowners' motion to dismiss for lack
of jurisdiction under Fed. R. Civ. P. 12(h)(3) (filing 16).
I. BACKGROUND
Under Innovations' insurance policy, Donegal has a duty to defend and
a duty to indemnify Innovations for bodily injury and property damage caused
by an accident. See filing 5 at 7, 8. The policy requires Innovations to

immediately send copies of "any demands, notices, summonses or legal papers
received in connection with" a lawsuit, and Innovations must assist and
cooperate as needed in defending the suit. Filing 5 at 5. Donegal's
representative attempted to inform Innovations that "failure to comply with
the conditions . . . may result in a declination of coverage." Id.
The homeowners sued Innovations in October 2021 in the District Court
of Lancaster County, Nebraska, alleging that Innovations improperly installed
windows.1 Donegal was not a party to the homeowners' lawsuit, nor did
Innovations inform Donegal of the lawsuit. Donegal first became aware of the
homeowners' claims a year after the lawsuit was filed. Filing 5 at 3. The
Donegal representative contacted the homeowners, indicating that Donegal
"was in the process of declining coverage to Innovations due to its failure to
comply with the policy." Id.
Donegal then sued Innovations and the homeowners in this Court.
Donegal alleges Innovations' policy excludes the damages sought by the
homeowners. See filing 5 at 10. Innovations appears to have fallen off the
Earth—it

did

not

respond

to

several

phone

calls

from

Donegal's

representatives regarding the homeowners' lawsuit, and emails were returned
as undeliverable. Filing 5 at 3. According to the Nebraska Secretary of State's
records, Innovations is an inactive LLC and it was administratively dissolved
in June 2023. In this lawsuit, Donegal completed service on Innovations by
publication, after several failed service attempts. See filing 26; filing 14.

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Specifically, the homeowners alleged that at least three windows were installed upside-

down, replacement windows were improperly sized, windows were improperly sealed, the
sealant used on some windows caused severe health issues, the windows decreased energy
efficiency in their house, and Innovations misrepresented the quality of the windows. See
filing 5 at 2.

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Donegal asks for declarations pursuant to 28 U.S.C. § 2201 that "Donegal
appropriately declined coverage to Innovations," and that "Donegal has no
ongoing duties and obligations . . . to defend or indemnify Innovations" in the
homeowners' lawsuit. Filing 5 at 11. In their counterclaim, the homeowners
have asked this Court to declare that Donegal is obligated "to pay the sums
that Innovations becomes legally obligated to pay as damages because of the
bodily injury sustained by" the homeowners. Filing 8 at 4.
The Court has taken judicial notice of Yelken v. Innovations Windows &
Siding, CI-21-41, the homeowners' lawsuit in the District Court of Lancaster
County, Nebraska. On October 31, 2023, the homeowners obtained a judgment
against Innovations. In December 2023, they initiated garnishment
proceedings against Donegal.
II. DISCUSSION
Donegal argues that the homeowners' counterclaim should be dismissed
because they lack standing under Nebraska law. The homeowners actually
agree, and further assert that they should be dismissed as parties because this
Court has no jurisdiction over Donegal's action against them under Nebraska
law. Donegal argues that the homeowners are "necessary parties" under both
Fed. R. Civ. P. 19 and Neb. Rev. Stat. § 25,159.
The parties' focus on Nebraska law is incorrect—this is a federal court,
and both the homeowners' and Donegal's actions were brought under 28 U.S.C.
§ 2201, seeking a declaration of their "rights and other legal relations." See
Dairyland Ins. Co. v. Makover, 654 F.2d 1120, 1125 (5th Cir. Unit B 1981) ("In
this case the action was not brought under authority provided by state law but
rather was instituted by the insurer pursuant to the Federal Declaratory
Judgment Act, [28 U.S.C. § 2201]."); filing 5; filing 8. So, the Court must
determine, as a matter of federal law, whether the parties have standing, even
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though the resolution of the parties' claims is dependent on state law. See
Capitol Indem. Corp. v. Haverfield, 218 F.3d 872, 874 (8th Cir. 2000).
Under federal law, there is an actual controversy between an injured
party and an insurance company based on the acts of a tortfeasor. See id.;
Nationwide Mut. Ins. Co. v. Barrow, 29 F.4th 1299, 1302 (11th Cir. 2022)
(citing Maryland Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270 (1941)); Amling
v. Harrow Indus. LLC, 943 F.3d 373, 378 (7th Cir. 2019). However, this is only
true as to an insurer's duty to indemnify—an injured party does not have
standing to invoke an insurer's duty to defend a tortfeasor. Barrow, 29 F.4th
at 1302-03.
Having determined this Court can hear both parties' claims as to
Donegal's duty to indemnify, the question now is whether it should. See
Cincinnati Indem. Co. v. A&K Constr. Co., 542 F.3d 623, 625 (8th Cir. 2008).
Exercising jurisdiction in a declaratory judgment action is discretionary. §
2201 (a federal district court "may declare the rights and other legal relations
of any interested party seeking such declaration" (emphasis added)); see also
Scottsdale Ins. Co. v. Detco Indus., 426 F.3d 994, 996 (8th Cir. 2010) (citing
Haverfield, 218 F.3d at 874). A district court may dismiss or stay a declaratory
judgment action which serves no useful purpose. Cincinnati Indem. Co., 542
F.3d at 625 (citing Wilton v. Seven Falls Co., 515 U.S. 277, 288 (1995)).
In the absence of a parallel action in state court involving the same
claims and the same parties, courts in the Eighth Circuit follow a six-factor
test to determine whether to abstain from a declaratory action. Scottsdale, 426
F.3d at 998 (quoting Aetna Cas. & Sur. Co. v. Ind-Com Elec. Co., 139 F.3d 419,
422 (4th Cir. 1998)). But "[i]t would be uneconomical as well as vexatious for a
federal court to proceed in a declaratory judgment suit where another suit is
pending in a state court presenting the same issues, not governed by federal
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law, between the same parties." Haverfield, 218 F.3d at 874-75 (quoting
Brillhart v. Excess Ins. Co., 316 U.S. 491, 495 (1942)).
In Haverfield, an insurance company sought a declaratory judgment
against its insured and the individuals injured by the insured, just like this
case. 218 F.3d at 873-74. The insurer filed its federal court action six months
before the injured parties filed a petition to collect the insurance pursuant to a
judgment against the insured. Id. at 875. The Eighth Circuit held that the
district court abused its discretion in denying a motion to dismiss when a
parallel state court proceeding was pending at the time the motion was denied.
Id.
The Court has taken judicial notice of the homeowners' proceedings in
state court. The homeowners filed a writ of garnishment against Donegal in
December 2023. There is a parallel action between the same parties pending
in state court, presenting the same issues, not governed by federal law. See id.;
Brillhart, 316 U.S. at 495. Even though Donegal filed its action well before the
current garnishment proceedings, Haverfield indicates that the Court should
not exercise jurisdiction under § 2201.
Additionally, it's unclear what "useful purpose" a declaratory judgment
would serve. See Cincinnati Indem. Co., 218 F.3d at 623 (citing Wilton, 515
U.S. at 288). Regarding Donegal's duty to defend, Innovations has not invoked
its rights under the policy—nor can it be said, given Innovations' failure to
respond to this lawsuit and its mysterious disappearance from the state court
proceedings, that such an invocation is likely to ever happen. Further,
judgment has been entered against Innovations, and Donegal did not defend it
in those proceedings. Donegal's request for a declaration that it has no duty to
defend Innovations in the homeowners' lawsuit is either moot, or it never
ripened to begin with, and a declaratory judgment is not appropriate.
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A declaratory judgment might be useful regarding Donegal's duty to
indemnify, but the Court cannot enter a default judgment in favor of Donegal
that would impact the rights of the homeowners. See, e.g., United Fire & Cas.
Ins. Co. v. Thompson, No. 1:09-cv-051, 2010 WL 561578, at *2 (E.D. Mo. Feb.
10, 2010). And for the reasons explained above, it is more appropriate for the
parties to sort out Donegal's obligations under the insurance policy in the
currently pending garnishment proceedings.
Given these circumstances, this Court will not exercise jurisdiction over
Donegal's § 2201 action against Innovations and the homeowners. The Court
will also exercise its discretion not to enter a default declaratory judgment
against Innovations. See Thompson, 2010 WL 561578, at *2. This case is
dismissed.2
IT IS ORDERED:
1.

The plaintiff's motion to dismiss (filing 9) is granted.

2.

Defendants Mary Yelken and Phillip Kottmeyer's motion to
dismiss (filing 16) is granted.

3.

The plaintiff's motion for default judgment (filing 29) is
denied.

2

A stay rather than a dismissal is preferred "where the possibility of a return to the federal

court remains." Haverfield, 218 F.3d at 875 n.2. But this Court sees no reason why the case
would return to federal court when the outcome of the state's garnishment proceedings will
be binding on the parties.

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4.

This case is dismissed.

5.

A separate judgment will be entered.

Dated this 27th day of March, 2024.
BY THE COURT:

John M. Gerrard
Senior United States District Judge

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