Liberty Mutual Fire Insurance Company v. KB Home, Inc. et al

Filing 163

ORDER affirming 157 order of the magistrate judge granting KB Defendants motion to stay, denying 144 Motion for Partial Summary Judgment, denying 150 Motion to Seal Document 149 PROPOSED SEALED Exhibit and denying 161 Motion to Strike. Signed by Senior Judge W. Earl Britt on 9/22/2016. (Marsh, K)

UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WESTERN DIVISION
No. 5:13-CV-831-BR
LIBERTY MUTUAL FIRE INSURANCE
COMPANY,
Plaintiff,
v.

)
)
)
)
)
KB HOME, KB HOME RALEIGH)
DURHAM, INC., and STOCK BUILDING )
SUPPLY, LLC,
)
Defendants.
)

ORDER

This matter is before the court on Liberty Mutual Fire Insurance Company’s (“Liberty”)
appeal from the 3 May 2016 order of United States Magistrate Judge Kimberly A. Swank. (DE #
158.) Also before the court is KB Home and KB Home Raleigh-Durham, Inc.’s (collectively
“KB Defendants”) motion to strike the response of intervenor Stock Building Supply, LLC
(“Stock”). (DE # 161). The motions have been fully briefed and are ripe for disposition.
I. BACKGROUND
As noted in the prior order of this court, this case arises from the settlement of a lawsuit
involving two commercial general liability insurance policies Liberty issued to KB Home
Raleigh-Durham, Inc.’s subcontractor, Stock, in 2005 and 2006. In December 2008, a group of
North Carolina homeowners filed a lawsuit against KB Defendants in Wake County Superior
Court, North Carolina, alleging that their homes had suffered water damage resulting from
improper home construction, Mark Elliott, et al. v. KB Home North Carolina, Inc. and KB Home
Raleigh-Durham, Inc., Case No. 08-CVS-21190 (the “Elliott action”). (See DE # 158-1.) KB
Defendants subsequently named Stock as a third-party defendant in the action. (See DE # 158-

2.) Additionally, in November 2010, KB Defendants filed a declaratory judgment action against
Liberty in the same state court, seeking defense as an additional insured under the policies.
(Answer, DE # 26, ¶ 10.) In February 2012, KB Defendants reached a settlement with Liberty
regarding the declaratory judgment action and Liberty’s defense obligations. (See DE ## 26-1,
26-2.) Liberty paid the ongoing defense costs incurred by KB Defendants in the Elliott action
until 9 May 2013, when it informed KB Defendants that it was stopping payment because the
policy limits had been exhausted as a result of payment of other claims. (Answer, DE # 26, ¶¶
36, 62.)
On 14 June 2013, Liberty filed this action seeking a declaration that it had fulfilled its
duty to defend KB Defendants pursuant to the terms of the policies and the parties’ settlement
agreement. (DE # 1.) KB Defendants filed an answer and asserted five counterclaims against
Liberty: (1) breach of insurance contract; (2) breach of contract; (3) breach of the implied
covenant of good faith and fair dealing; (4) unfair and deceptive trade practices; and (5)
declaratory judgment regarding indemnification under the policies, Liberty’s alleged statutory
violations, and Liberty’s ongoing defense obligations to KB Defendants. (DE # 26.) The parties
each moved for judgment on the pleadings with respect to their respective requests for
declaratory relief regarding Liberty’s duty to defend KB Defendants in the underlying action.
(DE ## 30, 39.)
On 28 October 2014, the court issued an order granting KB Defendants’ motion for
judgment on the pleadings, denying Liberty’s motion for judgment on the pleadings, and
dismissing Liberty’s complaint. (DE # 56.) In the order, the court declared that Liberty is
obligated to continue to defend KB Defendants under the terms of the parties’ settlement
agreement. (Id. at 10.) Following this declaration, KB Defendants filed a motion for partial

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judgment on the pleadings as to its second cause of action for breach of contract, which the court
granted on 14 August 2015. (DE # 80.) KB Defendants’ remaining counterclaims—the
remaining portions of count five, and counts one, three, and four—concern its allegations that
Liberty acted in bad faith settling claims made against Stock to the detriment of KB Defendants’
status as an additional insured under the policies.
On 23 January 2015, KB Defendants filed a motion to compel discovery in an effort to
obtain documents related to Stock’s claim file. (DE # 65.) A few days later, on 27 January
2015, Stock filed a motion to intervene in this action for the purpose of protecting its interest in
the privileged and confidential information that has been sought from Liberty by KB Defendants.
(DE # 70.) Liberty subsequently produced some but not all of the requested materials, asserting
the withheld documents were protected by the attorney-client privilege and the work-product
doctrine. (DE # 79.) By order dated 4 May 2015, the court granted in part and denied in part KB
Defendants’ motion to compel, and allowed Stock to intervene “for the limited purpose of
protecting its interest in discovery.” (DE # 106.)
On 25 January 2016, KB Defendants filed a motion to stay proceedings pending final
disposition of the underlying state-court litigation. (DE # 134.) KB Defendants asserted that,
without a stay, Liberty’s assertions of privilege and protection would preclude KB Defendants
from obtaining documents and other material facts and communications central to its claims
while the Elliott action is pending. (DE # 135, at 4.) In addition, KB Defendants argued that a
stay was necessary “due to the need to first resolve the liability issues in the underlying Elliott
Action as well as to quantify the KB Defendants’ defense and indemnity damages.” (Id. at 9.)
Stock filed a response indicating that it did not object to the stay of the matter. (DE # 139.)
Liberty, however, objected to the entry of the stay. (DE # 140.)

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On 3 May 2016, Judge Swank entered an order granting KB Defendants’ motion to stay,
and staying this action pending disposition of the Elliott action. (DE # 157.) Liberty filed an
appeal from that order on 17 May 2016, (DE # 158), to which KB Defendants and Stock each
filed responses in opposition, (DE ## 159, 160). KB Defendants filed a motion to strike Stock’s
response on 3 June 2016. (DE # 161.)
II. DISCUSSION
A. Motion to Strike
The court first addresses KB Defendants’ motion to strike Stock’s response to the appeal.
In support of the motion, KB Defendants argue that Stock was not entitled to file a response
because “Stock is not a party, and its interests were not adjudicated in the Order that Liberty is
appealing.” (DE # 161, at 1.) As noted above, Stock was permitted to intervene in this action
for the limited purpose of protecting its interest in discovery. The stay order at issue specifically
addresses whether delaying this action to await the outcome of the Elliott action will facilitate
the resolution of the parties’ discovery dispute over documents and communications relating to
Liberty’s handling and adjustment of Stock’s claims. Because the instant appeal involves
consideration of discovery issues relating to Stock’s claim file, the court finds that it falls within
the purpose for which Stock was allowed to intervene. Accordingly, the court will deny the
motion to strike and take Stock’s response into consideration in evaluating this appeal.
B. Motion to Stay
1. Standard of Review
The Federal Magistrates Act confers authority upon district judges to designate
magistrate judges to hear pretrial motions. 28 U.S.C. § 636(b)(1). When a magistrate judge
decides a non-dispositive motion, the district judge may, given a timely appeal, set aside the

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order if it “is clearly erroneous or is contrary to law.” Fed. R. Civ. P. 72(a). A magistrate
judge’s ruling involving a stay of proceedings is generally considered a non-dispositive motion
under Rule 72(a). See 28 U.S.C. § 636(b)(1)(A); PowerShare, Inc. v. Syntel, Inc., 597 F.3d 10,
13-14 (1st Cir. 2010) (holding that a motion to stay litigation that “is not dispositive of either the
case or any claim or defense within it” must properly be determined by a magistrate judge).
2. Analysis
On appeal, Liberty sets forth the following grounds upon which it contends the stay order
should be modified or set aside: (1) the magistrate judge applied the wrong legal standard in
determining whether to stay this matter; (2) the magistrate judge’s conclusion that the documents
withheld by Liberty on grounds of privilege will be produced following resolution of the
underlying state-court action is contrary to law; (3) the magistrate judge failed to consider the
issue of prejudgment interest; and (4) the stay order contains several misstatements of fact that
are not supported by the record. The court will address each of these arguments in turn.
Initially, Liberty challenges the stay of this action, arguing that the magistrate judge
misstated the record and applied the wrong legal standard in deciding the motion to stay. (DE #
158, at 3-4.) Liberty bases this argument on its contention that the stay order misstates the
remaining claims as “KB’s counterclaims one through four,” and fails to reflect that portions of
KB Defendants’ fifth cause of action for declaratory judgment remain to be adjudicated. (Id. at
3.) Liberty appears to suggest that, due to this apparently inadvertent error, the magistrate judge
improperly assessed the motion to stay by balancing the parties’ competing interests. (Id. at 3-4.)
According to Liberty, because this action includes a claim for declaratory judgment, the
magistrate judge should have analyzed the motion to stay under the four-factor test established in

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Nautilus Insurance Co. v. Winchester Homes, Inc., 15 F.3d 371, 375-76 (4th Cir. 1994). (Id. at
4-5.)
There is no dispute that the stay order misstates the claims remaining to be adjudicated in
this action. Previously, at the request of the parties, the court entered an order clarifying that the
28 October 2014 order addresses only a portion of KB Defendants’ counterclaim for declaratory
judgment, and left the remaining portions in count five seeking declaratory judgment regarding
Liberty’s indemnification obligations and alleged statutory violations intact. (See DE # 76.)
Thus, at issue here is whether the magistrate judge’s misstatement was relevant to the disposition
of the stay order.
The court’s authority to stay proceedings is “incidental to the power inherent in every
court to control the disposition of the causes on its docket with economy of time and effort for
itself, for counsel, and for litigants.” Landis v. N. Am. Co., 299 U.S. 248, 254 (1936). In
determining whether to exercise this power, the court “must weigh competing interests and
maintain an even balance.” Id. at 254-55 (citations omitted); see also United States v. Ga. Pac.
Corp., 562 F.2d 294, 296 (4th Cir. 1977) (per curiam) (“The determination by a district judge in
granting or denying a motion to stay proceedings calls for an exercise of judgment to balance the
various factors relevant to the expeditious and comprehensive disposition of the causes of action
on the court’s docket.”). “The party seeking a stay must justify it by clear and convincing
circumstances outweighing potential harm to the party against whom it is operative.” Williford
v. Armstrong World Indus., Inc., 715 F.2d 124, 127 (4th Cir. 1983).
Within the declaratory judgment context, a district court has broad discretion in deciding
whether to entertain an action brought under the Declaratory Judgment Act, even when the suit
otherwise satisfies subject matter jurisdictional prerequisites. Wilton v. Seven Falls Co., 515

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U.S. 277, 282 (1995); Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494 (1942). When a
related proceeding is pending, however, the court must take into account “considerations of
federalism, efficiency, and comity” in determining whether to exercise jurisdiction over a
declaratory judgment action. Penn-Am. Ins. Co. v. Coffey, 368 F.3d 409, 412 (4th Cir. 2004)
(citation and quotation marks omitted). To assist courts in balancing the state and federal
interests, the Fourth Circuit has enumerated four factors—commonly referred to as the Nautilus
factors— for district courts to consider in determining whether to stay or dismiss a declaratory
judgment action when a parallel proceeding is pending in state court. United Capitol Ins. Co. v.
Kapiloff, 155 F.3d 488, 493-94 (4th Cir. 1998) (citing Nautilus, 15 F.3d at 377).
The Nautilus factors that Liberty claims apply in this matter “govern[] a district court’s
decision to stay or to dismiss a declaratory judgment action at the outset.” Wilton, 515 U.S. at
283 (noting the circuit courts have adopted several abstention factors to guide district courts in
deciding whether to exercise jurisdiction at the outset of an insurance coverage case brought
under the Declaratory Judgment Act). Here, the court has already exercised jurisdiction over this
action, and has decided on the parties’ respective claims for declaratory relief regarding Liberty’s
duty to defend KB Defendants in the Elliott action. The motion to stay at issue is based on the
theory that the parties might be able to resolve their longstanding discovery dispute on issues
central to this action if the underlying state-court action is resolved first. Thus, unlike other
cases where the Nautilus factors have been applied, the current dispute does not center on the
usefulness of the declaratory judgment remedy or the adequacy of the federal forum to resolve
the remaining claims. See Aetna Cas. & Sur. Co. v. Ind-Com Elec. Co., 139 F.3d 419 (4th Cir.
1998); Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 258 (4th Cir. 1996). Given these

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circumstances, the court finds that the magistrate judge did not err in failing to apply the Nautilus
factors in this case.
Liberty also contends that, even if the magistrate judge applied the correct legal standard,
she did so improperly by presupposing that Liberty’s confidentiality concerns will be gone upon
resolution of the Elliott action. (DE # 158, at 12.) The court finds that this argument is without
merit. In the stay order, the magistrate judge carefully considered Liberty’s arguments regarding
its rights of confidentiality arising under the attorney-client privilege and work-product doctrine,
and recognized that “adjudication of the state-court litigation may not resolve all of the parties’
discovery disputes.” (DE # 157, at 5.) After balancing the parties’ competing interests, the
magistrate judge concluded that awaiting the outcome of the state-court litigation would not be
unfairly prejudicial to Liberty because there is a strong likelihood that “the interests held by
Liberty and Stock in preventing disclosure of settlement discussions and other information
contained in Stock’s claim file will be significantly diminished upon resolution of the Elliott
action.” (Id.) This reasoning is bolstered by the record, given that Stock did not oppose the stay
and acknowledged that the resolution of the Elliott action may mitigate some of its concerns
regarding discovery.
Next, Liberty requests, to the extent the case remains stayed, the court modify the stay
order to address the accrual of prejudgment interest during the period of the stay. (DE # 158, at
9-10.) In support, Liberty argues that it would be inequitable for prejudgment interest to
continue to accrue during the period of the stay when the delay is due to KB Defendants’ request
to stay proceedings and Liberty opposed the motion to stay. (Id.) The court finds no reason this
issue cannot be addressed at the time the entire matter of prejudgment interest is determined.

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Finally, Liberty objects to certain statements in the stay order on the ground that they are
unsupported by the record. (Id. at 12-13.) After reviewing Liberty’s objections, the court cannot
conclude that any of the misstatements identified by Liberty warrant reversal of the stay order.
Liberty first claims that the stay order inaccurately reflects a number of facts concerning the
underlying state-court litigation. (Id. at 12.) Liberty correctly notes that the stay order misstates
that the homeowners in the underlying action sued both KB Defendants and Stock. In fact, Stock
was named as a defendant in KB Defendants’ third-party complaint. Liberty also objects to the
stay order on the ground that it mischaracterizes the parties’ arguments in the present action. (Id.
at 13.) For example, with respect to Liberty’s defense obligations in the underlying action, the
stay order notes that “Liberty asserts that the limits of its policies were exhausted in March 2013
and that it therefore has no remaining duty to defend or indemnify the KB Home defendants.”
(DE # 157, at 3.) Liberty claims that, despite its stated intention to appeal the court’s order
declaring that Liberty is obligated to continue to defend KB Defendants in the Elliott Action
under the terms of the parties’ settlement agreement, it accepts and acknowledges that the court
has determined that Liberty owes a duty to defend KB Defendants. Although the stay order may
mischaracterize Liberty’s present position regarding its duty to defend, such an error does not
weaken the magistrate judge’s conclusion that staying this action will serve the parties’ interests
in full and complete disclosure of information relevant to their claims and allow for a fair
determination of any damages to which they may be entitled.
III. CONCLUSION
Having reviewed Liberty’s contentions regarding the magistrate judge’s order, the court
concludes that Liberty has not shown that any finding forming the basis of the stay order was
clearly erroneous or contrary to law. Accordingly, the 3 May 2016 order of the magistrate judge

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granting KB Defendants’ motion to stay is AFFIRMED. KB Defendants’ motion to strike, (DE
# 161), is DENIED. With respect to KB Defendants’ motion for partial summary judgment, (DE
#144), and motion to seal (DE # 150), the court DENIES these motions without prejudice. The
court DIRECTS the clerk to administratively close this case subject to it being reopened upon
appropriate motion of any party.
This 22 September 2016.

__________________________________

W. Earl Britt
Senior U.S. District Judge

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