Ohio Security Insurance Company v. K R Enterprises, Inc. et al

Filing 111

MEMORANDUM OPINION AND ORDER: Unlike K R Enterpises, Jeremy Evans has never appeared in this case. Accordingly, it is proper for the Clerk to enter default and that portion of the 104 motion is GRANTED. However, for the reasons stated in the Judge Goodwin cases, the 104 motion for a default judgment is DENIED. Signed by Senior Judge David A. Faber on 12/14/2017. (cc: attys) (mk)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
AT BLUEFIELD
OHIO SECURITY INSURANCE COMPANY,
Plaintiff,
v.

CIVIL ACTION NO. 1:15-16264

K R ENTERPRISES, INC., et al.,
Defendants.

MEMORANDUM OPINION AND ORDER
There were a number of motions pending before the court in
this matter.
motions.

On September 27, 2017, a hearing was held on those

By Order entered on December 8, 2017, the court ruled

on a number of those motions.

The reasons for those rulings

follow.
I.

Factual and Procedural Background

Plaintiff Ohio Security Insurance Company (“Ohio Security”)
is an insurance company organized under the laws of New Hampshire
with its principal place of business in Boston, Massachusetts.
See Second Amended Complaint ¶ 5.

Defendant K R Enterprises,

Inc. (“K R Enterprises”) is a Virginia corporation with its
principal place of business located in Martinsville, Virginia.
See id. at ¶ 6.

Defendant Jackson Hewitt, Inc. is a Virginia

corporation with its principal place of business in Parsippany,
New Jersey.

See id. at ¶ 7.

During the relevant time period,

Ohio Security issued a BusinessOwners Liability Policy to K R

Enterprises, Policy Number BZS (15) 56 08 16 29.
Complaint at ¶ 68.

See Amended

The Ohio Security Policy also included Data

Compromise and CyberOne Coverage endorsements.

See id. at ¶¶ 81

and 83.
The instant dispute centers on fraudulent tax returns filed
by defendant Jeremy Evans, a former employee of defendant K R
Enterprises, doing business as Jackson Hewitt.1

Specifically,

former customers of K R Enterprises have alleged that Evans
improperly accessed the records of K R Enterprises to obtain
their personal and confidential information for the purpose of
fraudulently filing their 2014 income tax returns.

All of the

former customers had sought assistance preparing their 2013 tax
returns from K R Enterprises and their confidential information
had been saved in the company’s database.
Upon discovering Evans’ conduct, these customers of K R
Enterprises filed suit in the Circuit Court of McDowell County,
West Virginia, against Evans, K R Enterprises, and Jackson Hewitt
raising various state law claims including, but not limited to,
Breach of Fiduciary Duty, Negligence, and Invasion of Privacy.
There are six of these lawsuits currently pending in the McDowell

1

According to the Second Amended Complaint, there was a
franchise agreement between K R Enterprises and Jackson Hewitt.
See Amended Complaint at ¶ 3.
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County Circuit Court.2

All of the state lawsuits allege that

Evans was arrested on or about February 4, 2015, at a K R
Enterprise location and that Evans admitted to police that he had
used the customers’ 2013 tax return information to fraudulently
file 2014 tax returns in their names.

For his part, Evans faces

criminal charges of identity theft, attempted felony, forgery,
uttering, petit larceny, and fraudulent schemes.
On December 18, 2015, Ohio Security Insurance Company filed
the instant declaratory judgment action on the basis of diversity
jurisdiction pursuant to 28 U.S.C. § 1332 and, on March 14, 2016,
it filed an amended complaint.

Ohio Security asks this court to

determine that it has no duty to defend or indemnify K R
Enterprises, Evans, or Jackson Hewitt3 under the BusinessOwners
liability coverage and/or or the Data Compromise and CyberOne
coverage for the six underlying lawsuits.
On March 23, 2017, the court denied defendants’ motions to
dismiss and/or stay urging the court to decline to exercise its

2

These lawsuits are as follows: Bailey, et al. v. Jackson
Hewitt, Inc., et al., Civil Action No. 15-C-50; Morgan v. Jackson
Hewitt, Inc., et al., Civil Action No. 15-C-49; Presley, et al.
v. Jackson Hewitt, Inc., et al., Civil Action No. 15-C-48; Sacra,
et al. v. Jackson Hewitt, Inc., et al., Civil Action No. 15-C117; Vanover, et al. v. Jackson Hewitt, Inc., et al., No. 15-C58; Wheeler, et al. v. Jackson Hewitt, Inc., et al., No. 15-C-48.
See Amended Complaint at ¶¶ 18-59.
3

The Second Amended Complaint alleges that Jackson Hewitt
might be an additional insured under the Policy. See Second
Amended Complaint at ¶¶ 88-90.
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authority under the Declaratory Judgment Act in favor of allowing
the issue of coverage to be resolved by the pending state
actions.

See ECF No. 54.

In so doing, the court considered the

Nautilus factors and found that the entanglement factor weighed
in favor of retaining jurisdiction and that the efficiency factor
weighed slightly in favor of retaining jurisdiction.

See id.

Thereafter, on May 22, 2017, the court granted Ohio
Security’s motion to amend the complaint to add Cathy S. Goodman
as a defendant to the lawsuit.

See ECF No. 70.

On February 27,

2017, Goodman had filed an amended complaint in the Circuit Court
of Wood County raising allegations similar to the six underlying
lawsuits pending in McDowell County and naming Jackson Hewitt,
Ohio Security, Evans, and K R Enterprises as defendants.

II.
A.

See id.

Analysis

Defendants’ Renewed Motion to Dismiss or Stay.
Defendants urge the court to reconsider its earlier ruling

denying their motions to dismiss and/or stay, arguing that
subsequent developments with respect to Jeremy Evans suggest that
this court’s decision with respect to the efficiency factor was
wrong.

As this court noted in its earlier order, the Fourth

Circuit Court of Appeals has enunciated four specific factors by
which the court’s analysis is to be guided:
(i) the strength of the state’s interest in having the
issues raised in the federal declaratory action decided
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in the state courts; (ii) whether the issues raised in
the federal action can more efficiently be resolved in
the court in which the state action is pending; . . .
(iii) whether permitting the federal action to go forward
would result in unnecessary “entanglement” between the
federal and state court systems, because of the presence
of “overlapping issues of fact or law” [; and (iv)]
whether the declaratory judgment action is being used
merely as a device for “procedural fencing” – that is,
“to provide another forum in a race for res judicata” or
“to achieve a federal hearing in a case otherwise not
removable.”
Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 257 (4th Cir.
1996)(quoting Nautilus Ins. Co. v. Winchester Homes, Inc., 15
F.3d 371, 376 (4th Cir. 1994)).
Yet, clear as it is that district courts have
discretion to stay or dismiss declaratory judgment
actions when parallel state proceedings are underway
that present opportunity for ventilation of the same
state law issues, it is equally clear that this
discretion is by no means unfettered. Indeed, allowing
unfettered discretion would not give effect to
Congress's clear intention in enacting the Declaratory
Judgment Act to make the declaratory remedy available,
as a general matter, in federal lawsuits. Thus, absent
a good reason not to exercise jurisdiction, federal
courts should hear declaratory judgment actions and
provide declaratory relief where it is warranted by law
and by the facts and circumstances of a particular
case.
Zurich American Ins. Co. v. Public Storage, 697 F. Supp.2d 640,
643 (E.D. Va. 2010) (internal citations and quotations omitted).
Even if this court were to accept defendants’ arguments
regarding the efficiency factor vis a vis Ohio Security’s
representations and actions with respect to Jeremy Evans, the
court still believes that the entanglement factor weighs in favor
of this court retaining jurisdiction.
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As the court noted with

respect to the entanglement factor, under Virginia law,
determining whether an insurer has a duty to defend is relatively
straightforward.

In deciding whether Ohio Security has a duty to

defend K R Enterprises, Jackson Hewitt and Evans in the
underlying lawsuits, under Virginia's “eight corners rule” the
court looks only to the underlying complaints and determines
whether the allegations therein come within the scope of the
Policy's coverage.

AES Corp. v. Steadfast Ins. Co., 725 S.E.2d

532, 535 (2012); see also CACI Int’l, Inc. v. St. Paul Fire and
Marine Ins. Co., 566 F.3d 150, 155–56 (4th Cir. 2009); Fuisz v.
Selective Ins. Co. of Am., 61 F.3d 238, 242 (4th Cir. 1995).

If

the complaint alleges any facts that, if proved, would render
Ohio Security liable under the Policy for a judgment against K R
Enterprises and Jackson Hewitt, then Ohio Security must defend
them in the underlying lawsuits.

See CACI, 566 F.3d at 155.

But

if it is clear that Ohio Security would not be liable under the
Policy for any judgment based on the allegations in the state
court complaints, then Ohio Security has no such duty to defend.
See id.

For this reason, the court can discern no entanglement

between the issues raised in this lawsuit and the underlying
lawsuits.

Accordingly, the court finds that the “entanglement”

factor weighs in favor of accepting jurisdiction.4

4

Although defendants made a brief argument during the
hearing that West Virginia law should govern interpretation of
the contract, they have failed to come forward with any evidence,
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Finding no compelling reason to revisit its earlier ruling
that this declaratory judgment action should go forward, the
renewed motion to dismiss and/or stay was denied.
B.

Cathy Goodman’s Motion to Dismiss.
Defendant Cathy Goodman moves the dismiss the Second Amended

Complaint as to her under the “first-to-file” rule.

The Goodman

lawsuit was filed in state court on February 9, 2017, and later
removed to the United States District Court for the Northern
District of West Virginia.

Ohio Security contends that, because

its declaratory judgment action (in which Goodman was not named
as a defendant) was filed before the Goodman lawsuit was filed,
this court should not dismiss Goodman from this lawsuit.

By

Order entered on July 31, 2017, Judge Bailey denied Ohio

or case authority for that matter, to support their argument. In
any event, West Virginia also follows the “eight corners” rule in
resolving the duty to defend. See Essex Ins. Co. v. Napple’s
Bullpen, LLC, 33 F. Supp.3d 667, 673 (N.D.W. Va. 2014) (“The West
Virginia Supreme Court has found that an insurance company may
decide `whether it must provide liability coverage and/or a
defense to the insured based upon two documents: the complaint,
and the insurance policy.’ West Virginia Fire & Cas. Co. v.
Stanley, 216 W. Va. 40, 602 S.E.2d 483, 498-99 (2004). Thus
resolution of the duty-to-defend question `requires examination
of (1) the policy language to ascertain the terms of the coverage
and (2) the underlying complaint to determine whether any claims
alleged therein are covered by the policy.’ Fuisz v. Selective
Ins. Co. of Am., 61 F.3d 238, 242 (4th Cir. 1995). `This
principle is [sometimes] known as the `eight corners rule’
because the determination is made by comparing the `four corners’
of the underlying complaint with the `four corners’ of the
policy.’ First Tenn. Bank Nat’l Ass’n v. St. Paul Fire & Marine
Ins. Co., 501 F. App’x 255 (4th Cir. 2012).”).
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Security’s motion to stay the Goodman case in that court pending
resolution of this case.
Under the first-to-file rule, a district court may, in its
discretion, dismiss, stay, or transfer a later filed lawsuit in
deference to the first-filed action.

See Allied-General Nuclear

Servs. v. Commonwealth Edison Co., 675 F.2d 610, 611 n.1 (4th
Cir. 1982) (“Ordinarily, when multiple suits are filed in
different Federal courts upon the same factual issues, the first
or prior action is permitted to proceed to the exclusion of
another subsequently filed.”).

Given that Cathy Goodman was

added as a defendant to this lawsuit after she had already filed
her own lawsuit, the court agrees that her lawsuit was the firstfiled.

Furthermore, unless this court grants Cathy Goodman’s

motion to dismiss, she will be a party to two federal lawsuits
that involve overlapping issues and which could, in theory,
produce inconsistent results.

Based on the foregoing, the court

granted Goodman’s motion to dismiss.
C.

Motion for Default Entry of Default and Default Judgment
against K R Enterprises.
Because K R Enterprises did not answer the Second Amended

Complaint, Ohio Security moved for the entry of default and a
default judgment as to K R Enterprises.

However, K R Enterprises

has appeared in this lawsuit, answering both the original and
first amended complaints.

Between the filing of the First and

Second Amended Complaints, counsel for K R Enterprises was
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permitted to withdraw as counsel of record due to nonpayment of
fees.
In a series of cases, Judge Goodwin has made a rather
compelling argument about why a court should be reluctant to
enter a default judgment in a declaratory judgment action.
As a general principle, this court is wary of entering
default judgment in a suit for declaratory relief. By
nature, a declaratory judgment action is
jurisdictionally unique. I am uncomfortable with the
idea of providing declaratory relief where the merits
of a case have not been fully litigated. See
Restatement 2d Judgment § 33 (stating that a court
“should not make a declaration upon default on the
basis of the pleadings alone but should require the
plaintiff to present enough evidence to warrant the
granting of declaratory relief”).
My concern about entering declaratory judgment by
default is particularly pronounced in insurance
disputes. When a declaratory judgment action is
brought by an insurance carrier, the suit may influence
the way courts later interpret other identical
policies. I do not believe that an individual
insured's failure to respond in a given action is
sufficient justification for a declaration that may
later affect non-party policy holders. For this
reason, I generally decline to enter default judgment
in such cases when a party has appeared to oppose the
default judgment. In such cases, I believe that less
drastic sanctions are the more appropriate remedy.
Teachers Ins. Co. v. Prather, Civil Action No. 2:11-cv-00397,
2012 WL 90095, at *2 (S.D.W. Va. Jan. 11, 2012); see also State
Auto Property and Cas. Ins. Co. v. Fas Chek Enterprises, Inc.,
Civil Action No. 2:15-cv-00809, 2015 W: 1894011, *2

(S.D.W. Va.

Apr. 27, 2015) (“Generally, I decline to enter default judgment

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in such cases when the nonmoving party has demonstrated
opposition to it in some manner.”).
The instant situation presents an even more compelling
reason why this court should decline to enter a default judgment
against K R Enterprises.

K R Enterprises’ failure to answer the

second amended complaint is a result of its failure to pay its
attorneys’ fees.

It is unable to pay its attorneys’ fees because

its insurance carrier has stated that it has no duty to defend.
For these reasons, the court granted Ohio Security’s motion
insofar as it asked the Clerk to enter default but the motion for
a default judgment was denied.
D.

Motion for Default Entry of Default and Default Judgment
against Jeremy W. Evans. (ECF No. 104)
Unlike K R Enterprises, Jeremy Evans has never appeared in

this case.

Accordingly, it is proper for the Clerk to enter

default and that portion of the motion is GRANTED.

However, for

the reasons stated in the Judge Goodwin cases, the motion for a
default judgment is DENIED.
E.

Joint Motion to Modify Amended Scheduling Order.
The court granted the joint motion to modify the Amended

Scheduling Order and continued the dates therein generally.
Within 14 days of entry of this Memorandum Opinion and Order, the
parties are DIRECTED to confer and provide proposed dates to the
court for a new scheduling order.

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Based upon the representations

of counsel at the hearing, this court is particularly interested
in an agreed deadline for the filing of dispositive motions.
III.

Conclusion

The motion for entry of default as to Jeremy W. Evans is
GRANTED and the motion for default judgment is DENIED.
The Clerk is directed to send copies of this Memorandum
Opinion and Order to counsel of record.
It is SO ORDERED this 14th day of December, 2017.
ENTER:

David A. Faber
Senior United States District Judge

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