National Specialty Insurance Company v. AIG Domestic Claims Inc et al

Filing 86

ORDER granting 26 Motion to Dismiss as set out. Signed by Honorable J Michelle Childs on 8/8/11.(awil) Modified on 8/9/2011 to edit text (awil).

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
GREENVILLE DIVISION
National Specialty Insurance Company,
individually and as assignee of Trans Select
d/b/a Select Transport Systems,

)
)
)
)
Plaintiff,
)
)
v.
)
)
AIG Domestic Claims, Inc. and National
)
Union Fire Insurance Company of
)
Pittsburgh, Pa.,
)
)
Defendants.
)
__________________________________________ )

C.A. No.: 6:10-cv-00826-JMC
ORDER AND OPINION

This matter is before the court on Defendant AIG Domestic Claims, Inc.‟s (“Domestic
Claims”) Motion to Dismiss [Doc. 26] on the ground that Plaintiff National Specialty‟s
(“National Specialty”) claims are barred by the doctrine of res judicata. For the reasons stated
herein, Domestic Claims‟ Motion to Dismiss is GRANTED.
FACTUAL/PROCEDURAL BACKGROUND
Plaintiff National Specialty Insurance Company (“National Specialty”) brought this
action against Defendants Domestic Claims and National Union Fire Insurance Company of
Pittsburg, PA (“National Union”) (collectively “Defendants”) on March 2, 2010, in the
Greenville County Court of Common Pleas. [Doc. 1-1, at 3]. Defendants removed the suit to this
court on April 2, 2010. [Doc. 1]. National Specialty seeks a declaration by this court that an
insurance policy issued by National Union to Jamison Group, Inc. (“Jamison Group”) provides
coverage for a default judgment National Specialty obtained against Jamison Group in the suit
captioned National Specialty Insurance Company, Individually and as assignee of Trans Select
d/b/a Select Transportation Systems vs. the Jamison Group, Inc. and Marvin Williams, 2007-CP-

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23-3705 (“Underlying Suit”), and further alleges causes of action against Defendants for breach
of contract, bad faith and negligence. [Doc. 1-1]. On April 2, 2010, Defendants filed their
Answer asserting, inter alia, that the Complaint failed to state a cause of action for which relief
could be granted against Defendants and must be dismissed. [Doc. 4, at 3, ¶ 15]. Specifically,
Defendants asserted that Domestic Claims is not an insurer and did not issue an insurance policy
to Jamison Group. [Doc. 4, at 4, ¶ 18].
This is the second iteration of this suit. National Specialty previously filed a related
lawsuit, Civil Action No. 2:09-cv-01183-JFA, against the same Defendants in the United States
District Court for the District of South Carolina, Columbia Division (“Original Action”).
Defendants moved to dismiss the Original Action pursuant to Fed. R. Civ. P. 12(b)(6). Judge
Joseph F. Anderson dismissed the Original Action against Domestic Claims in its entirety on the
grounds that, inter alia, South Carolina does not recognize a cause of action for bad faith against
an independent insurance company and Domestic Claims was not a party to the National Union
policy. [Doc. 23-3, at 4]. Judge Anderson also dismissed the bad faith cause of action against
National Union. [Doc. 23-3, at 3]. Thereafter, National Specialty moved for, and was granted, a
voluntary dismissal of the remaining causes of action against National Union. [Doc. 23-4].
National Specialty did not appeal the dismissal of the Original Action against Domestic Claims.
Domestic Claims now moves for an order dismissing National Specialty‟s allegations
against it on the grounds that National Specialty‟s claims are barred by the doctrines of claim and
issue preclusion.
DISCUSSION
“Under res judicata, a prior judgment between the same parties can preclude subsequent
litigation on those matters actually and necessarily resolved in the first adjudication.” In re Varat

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Enters., Inc., 81 F.3d 1310, 1315 (4th Cir. 1996). Res judicata “encompasses two concepts:
claim preclusion and issue preclusion, or collateral estoppel.” Id. Under claim preclusion, “if the
later litigation arises from the same cause of action as the first, then the judgment bars litigation
not only of every matter actually adjudicated in the earlier case, but also of every claim that
might have been presented.” Id. (quoting Nevada v. United States, 463 U.S. 110, 129-30 (1983)).
“Issue preclusion is a more narrow concept and applies when the later litigation arises from a
different cause of action.” Id. (citing Nevada, 463 U.S. at 130 n.11). Issue preclusion “bar[s]
subsequent litigation of those legal and factual issues common to both actions that were „actually
and necessarily determined by a court of competent jurisdiction‟ in the first litigation”. Id.
(citing Montana v. United States, 440 U.S. 147, 153 (1979)); see also Combs v. Richardson, 838
F.2d 112, 114 (4th Cir. 1988).
I.

Claim Preclusion
Domestic Claims argues that National Specialty‟s claims against it are barred by the

doctrine of res judicata because the precise allegations that are the subject of National
Specialty‟s Complaint against Domestic Claims were litigated and decided adversely to National
Specialty in the Original Action.
Generally, to establish claim preclusion, three conditions must be met: (1) the prior
judgment must have been final, on the merits, and rendered by a court of competent jurisdiction
in accordance with the requirements of due process; (2) the actions involved identical parties or
their privies; and (3) the claims in the latter action are based upon the same causes of action
asserted in the former action. See In re Varat, 81 F.3d at 1315.

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A.

The Prior Judgment
National Specialty argues that the court‟s order in the Original Action [Doc. 26-3] makes

plain that the primary reason for the dismissal of Domestic Claims from that suit, including
dismissal of National Specialty‟s bad faith claim, was based on a lack of standing. National
Specialty further argues that a lack of jurisdiction is not an adjudication on the merits because
such a finding is, in essence, a holding that the court lacked jurisdiction to hear the matter. See
United States v. Wills, 346 F.3d 476, 488 (4th Cir. 2003) (concluding that “dismissal for lack of
jurisdiction was not an adjudication on the merits . . . [t]herefore, the principles of collateral
estoppel [or] res judicata . . . are inapplicable.”); See also, Friends of the Earth, Inc. v. Gaston
Copper Recycling Corp., 179 F.3d 107, 109 (4th Cir. 1999) (affirming the district court‟s
dismissal of the citizens suit for lack of subject matter jurisdiction, concluding that FOE and
CLEAN lacked standing).
Despite National Specialty‟s focus on the issue of standing, a close review of Judge
Anderson‟s order dismissing Domestic Claims in the Original Action reveals that standing was
not the sole basis upon which that order was decided. [Doc. 26-3, at 4]. The court also dismissed
National Specialty‟s bad faith claim against Domestic Claims and in doing so stated:

Neither [Domestic Claims] nor National Specialty were party to the policy issued
by National Union, and therefore National Specialty cannot establish the
existence of a mutually binding contract for insurance necessary to pursue its
claim. Moreover, South Carolina does not recognize a cause of action for bad
faith against an independent adjusting company. For both of these reasons,
National Specialty‟s claim of bad faith against [Domestic Claims] is dismissed.
[Doc. 26-3 at 3-4] (emphasis added). Moreover, the court based its dismissal of National Specialty‟s
breach of contract action against Domestic Claims on National Specialty‟s failure to proffer “any
legal theory by which Domestic Claims would be liable to provide insurance coverage under the
National Union policy.” [Doc. 26-3, at 4]. This recognized failure was not based on National

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Specialty‟s failure to obtain an assignment, but rather on the recognized fact that Domestic

Claims was not a party to the National Union policy. [Doc. 26-3, at 4].
National Specialty also argues that the court‟s order in the Original Action does not state
or suggest that the dismissal is with prejudice. See [Doc. 31, at 6]. According to National
Specialty, the implication of the court‟s language (or lack thereof) is that it intended that the
dismissal be without prejudice. As support, National Specialty provides the following excerpt
from the court‟s order in the Original Action:
National Specialty . . . offer[s] only its aspiration that it may one day secure an
assignment of rights from the Jamison Group. In the absence of such an
assignment, the Court finds that National Specialty is a stranger to the National
Union Policy and lacks standing to pursue a bad faith claim.
[Doc. 26-3, at 3].
“[A]

dismissal for failure to state a claim under Rule 12(b)(6) is presumed to be both a

judgment on the merits and to be rendered with prejudice.” McLean v. United States, 566 F.3d
391, 396 (4th Cir. 2009); see also Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 399 n.3
(1981) (“The dismissal for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6)
is a „judgment on the merits.‟”); Carter v. Norfolk Cmty. Hosp. Ass'n, 761 F.2d 970, 974 (4th
Cir. 1985) (“A district court's dismissal under Rule 12(b)(6) is, of course, with prejudice unless it
specifically orders dismissal without prejudice.”). In order to refute this clear proposition of law,
National Specialty alleges the Original Action was not dismissed pursuant to Fed. R. Civ. P.
12(b)(6) and points to the absence of a specific citation of the rule in the court‟s order in the
Original Action. [Doc. 31, at 6]. Despite the absence of such a citation, it is apparent the
dismissal was because of National Specialty‟s failure to state a claim against Domestic Claims
for which relief could be granted. See [Doc. 26-3, at 3-4]. Moreover, Domestic Claims‟ Motion
to Dismiss the Original Action, which the court granted, was specifically based on Fed. R. Civ.
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P. 12(b)(6). See [Doc. 18, Civil Action No. 2:09-cv-01183-JFA]. It is not necessary for the
court to specifically repeat the Rule in its Order. See Orcha Yachts, LLC v. Mollicam, Inc., 287
F.3d 316, 319 (4th Cir. 2002) (finding that although Rule 41 was not mentioned in lower court‟s
order dismissing case, the order was plainly an involuntary dismissal for violation of the rules
under Rule 41(b), and as such, an adjudication on the merits); see also United States v. Hill, No.
10-4102, 2010 WL 3452768, at *17 (4th Cir. 2010) (finding court‟s order as to sentencing proper
despite failure to specifically cite sentencing guideline statute where court considered many of
the factors listed in the statute). Thus, this court finds that the dismissal of the Original Action
against Domestic Claims was pursuant to Fed. R. Civ. P. 12(b)(6) and on the merits.
Accordingly, the court finds that Domestic Claims has established the first element of claim
preclusion.
B.

Identity of the Parties
The identity of the parties in both the instant action and the Original Action are the same.

Compare [Doc. 1-1, at 3-9] with [Doc. 1-1, at 4-6, Civil Action No. 2:09-cv-01183-JFA].
C.

Similarity of Claims
Domestic Claims argues that the causes of action in the instant case and the Original

Action arise out of the same causes of action: breach of contract, bad faith, and negligence.
Compare [Doc. 1-1, at 3-9] with [Doc. 1-1, at 4-6, Civil Action No. 2:09-cv-01183-JFA].
According to National Specialty, there was no negligence claim against Domestic Claims or
National Union in the Original Action. [Doc. 31-3, at 1-3]. National Specialty also argues that
the bad faith cause of action against Domestic Claims is a different claim than that in the
Original Action because Domestic Claims was, both in the Complaint [Doc. 31-3, at 1, ¶¶ 2, 3]
and by the court‟s order in the Original Action [Doc. 31-5, at 3], considered to be an independent

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adjusting company. National Specialty claims that further investigation has revealed that
Domestic Claims is an in-house adjuster for National Union, rather than an independent adjuster,
and that this changes the nature of the cause of action.
In the Order in the Original Action, the court cited Charleston Dry Cleaners & Laundry
v. Zurich American Insurance Co., which held that South Carolina does not recognize a cause of
action for bad faith or negligence by an insured against an independent adjusting company. 586
S.E.2d 586 (S.C. 2003); See [Doc. 31-5, at 3]. According to National Specialty, Domestic
Claims is an in-house adjuster for National Union, and, as a result, Charleston Dry Cleaners is
no longer dispositive.
National Specialty relies on Addison v. The Travelers Indemnity Co., which, in its view,
provides a reasonable basis for asserting bad faith and negligence claims against Domestic
Claims. In Addison, the court discussed Charleston Dry Cleaners and held as follows:
In Charleston Dry Cleaners & Laundry, the Court held that although the insurer owes the
insured a duty of good faith and fair dealing, this duty of good faith arising under contract
does not extend to a person who is not a party to the insurance contract. The Charleston
court specifically held that two independent adjusters retained by an insurance company
to adjust an insured‟s claim did not owe a duty to the insured. The Charleston court
emphasized that a company should not be held liable for the poor adjustment of an
adjuster if the adjuster is not an employee of the insurance company. The Charleston
court was thus silent as to whether an in-house adjuster also owes no duty to an insured.
The court infers that the Charleston court did not intend for this ruling to cover adjusters
who are employees of insurance companies and who adjust claims specifically between
their employer and its claimants . . . Fulmer is an in-house adjuster for Travelers,
indicating that he is employed by Travelers for the specific purpose of adjusting claims
between Travelers and its policy holders. Since the facts as alleged by Plaintiff indicate
that Fulmer acted in a way which prolonged and delayed any settlement of Plaintiff s
claim, Plaintiff has an arguably reasonable basis for a state court claim against Fulmer
under a negligence theory.

C.A. No. 1:09-cv-03086-MBS, 2010 WL 3258585 at *3 (D.S.C. Aug 17, 2010).

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National Specialty asserts that its Complaint in the instant action alleges specifically that
Domestic Claims was the authorized claims department for National Union. [Doc. 31-8, at 2, ¶
8]. National Specialty argues that in light of the holding in Addison, the implication of National
Specialty‟s factual allegation, especially the word “department,” is that Domestic Claims was the
in-house claims agency that handled National Union‟s claims and that for purposes of dismissal
under Fed. R. Civ. P. 12(b)(6), this factual allegation in National Specialty‟s Complaint must be
accepted as true.1 However, this argument is unavailing because the instant motion is made on
res judicata grounds, not on the basis of Rule 12(b)(6).
Despite National Specialty‟s arguments and its allegations with respect to Domestic
Claims‟ status as an in-house or independent adjuster, the court finds that the claims in the
instant case are identical to those alleged against Domestic Claims in the Original Action. A
comparison of the two Complaints reveals the allegations are virtually identical. Compare [Doc.
1-1, at 3-9] with [Doc. 1-1, at 4-6, Civil Action No. 2:09-cv-01183-JFA]. The complaints vary in
the name given to the causes of action alleged and the addition of the negligence cause of action.
However, the legal label given to a cause of action is immaterial. See Labram v. Havel, 43 F.3d
918, 920-21 (4th Cir. 1995). Rather, it is the legal and factual basis underlying the claim that
controls. Id. Furthermore, under the doctrine of claim preclusion, “if the later litigation arises
from the same cause of action as the first, then the judgment bars litigation not only of every
matter actually adjudicated in the earlier case, but also of every claim that might have been
presented.” In re Varat Enters., Inc., 81 F.3d 1310, 1315 (4th Cir. 1996) (emphasis added). The
negligence cause of action is merely a recharacterization of National Specialty‟s cause of action
1

In addition, National Specialty argues that while not necessary for this 12(b)(6) motion, it should be noted that the
Rule 30(b)(6) deponent for both Domestic Claims and National Union, Antonio Daskalakis (“Daskalakis”), provided
testimony that raises the same inference. See [Doc. 31-1, at 5-6]. National Specialty argues that its bad faith and
negligence claims against an in-house claims adjuster are different causes of action than in the Original Action
against an independent claims adjuster and that the same issue has not been previously litigated or determined.

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for bad faith refusal to pay first party benefits and that cause of action could have been brought
in the Original Action. See Fed. R. Civ. P. 8, 18; cf. Fed. R. Civ. P. 13(a); see also Keith v.
Aldridge, 900 F.2d 736, 740 n.5 (4th Cir. 1990) (“For res judicata purposes... it is the existence
of the claim, not awareness of it, that controls.”) Accordingly, the negligence cause of action is
barred despite National Specialty‟s failure to plead that specific cause of action in the Original
Action.
II.

Issue Preclusion
Domestic Claims contends that the issues and relief sought in the instant case are

identical to those litigated in the Original Action.
To establish that issue preclusion should be applied to bar a plaintiff‟s claims, a
defendant must establish five elements, which the United States Court of Appeals for the Fourth
Circuit has articulated as follows:
Collateral estoppel forecloses the relitigation of issues of fact or law that are
identical to issues which have been actually determined and necessarily decided
in prior litigation in which the party against whom [issue preclusion] is asserted
had a full and fair opportunity to litigate. For collateral estoppel to apply, the
proponent must establish that: (1) the issue sought to be precluded is identical to
one previously litigated; (2) the issue must have been actually determined in the
prior proceeding; (3) determination of the issue must have been a critical and
necessary part of the decision in the prior proceeding; (4) the prior judgment
must be final and valid; and (5) the party against whom estoppel is asserted must
have had a full and fair opportunity to litigate the issue in the previous forum.
Sedlack v. Braswell Services Group, Inc., 134 F.3d 219, 224 (4th Cir. 1998). For collateral
estoppel purposes, an issue has been defined as “„a single, certain and material point arising out
of the allegations and contentions of the parties.‟” 18 MOORE'S FEDERAL PRACTICE § 132.02[1]
(Matthew Bender 3d) (quoting Paine & Williams Co. v. Baldwin Rubber Co., 113 F.2d 840, 843
(6th Cir. 1940) (“[A]n issue sometimes arises from the affirmation on the one side and the denial
on the other of some material point of law or fact as developed by the evidence.”)) In addition,

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“[a]n issue may concern only the existence or nonexistence of certain facts, or it may concern the
legal significance of those facts.” Id.
A.

Identity of Issues
National Specialty argues that in the Original Action, the issue of the potential liability of

an independent claims adjuster was litigated and determined but that in the instant action the
issue is the liability of Domestic Claims as an in-house adjuster. The court disagrees.
The issues presented in this case were actually determined and necessarily decided in the
Original Action. National Specialty erroneously frames the court‟s ruling in the Original Action
as relating solely to the liability of an independent claims adjuster as opposed to an in-house
claims adjuster; however, the court‟s ruling was not based on that issue but instead upon whether
Domestic Claims was in privity of contract with National Specialty. See [Doc. 26-3]. In finding
that Domestic Claims was not liable for bad faith or breach of contract, the court specifically
noted, not only that National Specialty was not a party to the National Union policy, but also
significantly, that Domestic Claims was not a party to the insurance contract. [Doc. 26-3, at 3].
Thus, even if National Specialty had obtained an assignment, there still would be no privity of
contract between it and Domestic Claims. Under South Carolina insurance law, the duty of good
faith in the performance of obligations arises under the insurance contract and therefore does not
extend to a person who is not in privity of contract with the insured. See Carolina Bank & Trust
Co. v. St. Paul Fire and Marine Co., 279 S.C. 576, 580-581, 310 S.E.2d 163, 166 (Ct. App.
1983). Accordingly, the court found there was no privity of contract between National Specialty
and Domestic Claims, and therefore there was no cause of action for bad faith. [Doc. 26-3 at 34]. The court also found the lack of privity of contract dispositive of National Specialty‟s claim
for breach of contract against Domestic Claims in the Original Action. [Doc. 26-3 at 4].

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(“National Specialty has failed to provide evidence suggesting that AIG issued an insurance
policy of any kind to any party to this case. National Specialty has also failed to produce a legal
theory by which AIG would be liable to provide insurance coverage under the National Union
policy. As argued in National Union and AIG‟s briefs – any insurance benefits owed under the
National Union policy are owed by National Union and not AIG.”)). Thus, the issues relating to
Domestic Claims‟ liability for bad faith or breach of contract were actually decided in the
Original Action. 2
B.

The Actually Determined Requirement
“Under collateral estoppel, once an issue is actually and necessarily determined by a

court of competent jurisdiction, that determination is conclusive in subsequent suits based on a
different cause of action involving a party to the prior litigation.” Montana v. U.S., 440 U.S.
147, 153 (1979) (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979)). Here, the
issue litigated and actually decided in the Original Action was not merely whether Domestic
Claims was an independent adjuster, but also whether Domestic Claims was a party to the
National Union policy. [Doc. 31-5, at 4]. Accordingly for the reasons outlined above, see supra
Part II.B., the court finds that Domestic Claims has established the “actually determined”
element.

2

To be clear, this court‟s holding is not that there could never be privity of contract or a duty of care arising between
an in-house adjuster and an insured. This court recognizes that the court in Addison “infer[red] that the Charleston
court did not intend for [its ruling as to independent adjusters] to cover adjusters who are employees of insurance
companies and who adjust claims specifically between their employer and its claimants.” Addison, 2010 WL
3258585, at *3. Nevertheless, this court bases its finding in the instant case on Judge Anderson‟s holding in the
Original Action that there was no privity of contract between Domestic Claims and National Specialty. See [Doc.
23-3, at 4]. Judge Anderson‟s order in the Original Action, See [Doc. 23-3, at 4], was a judgment on the merits, and
the record indicates that National Specialty did not appeal that ruling.

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C.

Critical and Necessary Part of Decision
According to the United States Court of Appeals for the Fourth Circuit, “in describing the

scope of the „critical and necessary‟ criterion, we have used the alternative word „essential.‟” In
re Microsoft Corp. Antitrust Litig., 355 F.3d 322, 327-329 (4th Cir. 2004) (citing Polk v.
Montgomery Cty., Maryland, 782 F.2d 1196, 1201 (4th Cir. 1986)).

Similarly, “for issue

preclusion to apply, the issue must have been actually litigated and have been essential to the
prior litigation.” 18 MOORE'S FEDERAL PRACTICE § 132.03[4][a] (Matthew Bender 3d). Again,
for the reasons outlined above, see supra Part II.B., the court finds that the issue of Domestic
Claims‟ liability under the National Union policy was “essential” to the court‟s finding in the
Original Action. See [Doc. 31-5, at 4].
D.

Finality and Validity of Prior Judgment
Simply put, “[t]he application of issue preclusion requires a final judgment (or decision

of the issue) in the first action.” 18 MOORE'S FEDERAL PRACTICE § 132.03[5][b][i] (Matthew
Bender 3d). National Specialty argues that the issue regarding potential liability of independent
claims adjusters was finally decided and that issue is no longer a part of this case. [Doc. 31, at
10]. National Specialty further argues that the court‟s holdings on the lack of standing in the
Original Action were not determinations on the merits and that, given the assignment from
Jamison to National Specialty of all its rights and claims, standing is no longer in dispute in the
instant case. [Doc. 31, at 10]. However, these contentions are beside the point because the court
in the Original Action dismissed Domestic Claims on the basis that it was not a party to National
Union‟s insurance contract. Accordingly, the court finds that Domestic Claims has established
the finality element.

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E.

Full and Fair Opportunity to Litigate Issue in Previous Forum
National Specialty argues that the court‟s order of January 28, 2010, in the Original

Action [Doc. 31-6] allowing National Specialty to dismiss the declaratory action without
prejudice plainly implies that National Specialty did not have a full and fair opportunity to
litigate the issues. National Specialty contends that the disposition in the January 28, 2010, order
was a dismissal without prejudice and that the court‟s order implies as much because of the
court‟s mention of confusion arising from the demise of the Jamison Group. [Doc. 31-6, at 5]. In
National Specialty‟s view, the consequence of the January 28, 2010, order is that National
Specialty was unable to find and obtain an assignment from principals of the Jamison Group, a
defunct insurance agency, and that it was precluded from having a full and fair opportunity to
litigate practically all of the issues in the prior litigation. The court finds these arguments
unpersuasive.
The January 28, 2010, order in the Original Action was concerned with National
Specialty‟s claims against National Union and not with National Specialty‟s claims against
Domestic Claims. See [Doc. 26-4]. Indeed, at the time the January 28, 2010, order was issued,
Domestic Claims was no longer a party to the Original Action because the court granted
Domestic Claims‟ Rule 12(b)(6) Motion to Dismiss. See [Doc. 26-3]; [Doc. 26-4]. An
examination of Judge Anderson‟s January 14, 2010, order and the parties‟ briefs on Domestic
Claims‟ Rule 12(b)(6) motion reveals that National Specialty was indeed afforded an opportunity
to litigate the issues that it seeks to litigate in the instant case. See [Doc. 26-3]; see also [Doc. 264]. Accordingly, the court finds that Domestic Claims has established the elements of claim
preclusion.

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CONCLUSION
For the foregoing reasons, Domestic Claims‟ Motion to Dismiss [Doc. 26] on grounds of
res judicata is GRANTED and AIG Domestic Claims, Inc. is DISMISSED with prejudice.

IT IS SO ORDERED.

s/ J. Michelle Childs
United States District Judge

Greenville, South Carolina
August 8, 2011

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