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Kuepers Construction, Inc. v. State Auto Insurance Co.

United States District Court, D. Minnesota

July 13, 2015

Kuepers Construction, Inc. and Interlachen Propertyowners Association, Inc., Plaintiffs,
v.
State Auto Insurance Company, Defendant.

Jason Tarasek, Esq., Hammargren & Meyer, P.A., Bloomington, MN, on behalf of Plaintiffs.

Cheryl A. Hood Langel, Esq., McCollum Crowley Moschet Miller & Laak, Ltd., Minneapolis, MN, on behalf of Defendant.

MEMORANDUM OPINION AND ORDER

ANN D. MONTGOMERY, District Judge.

I. INTRODUCTION

On April 14, 2015, the undersigned United States District Judge heard oral argument on Defendant State Auto Insurance Company's ("State Auto") Motion to Dismiss [Docket No. 3] and Motion to Dismiss Cross-Claim [Docket No. 19] and Plaintiff Kuepers Construction, Inc.'s ("Kuepers") Motion to Remand [Docket No. 11]. On April 27, 2015, Magistrate Judge Brisbois granted State Auto's Motion for Realignment of the Parties [Docket No. 43] ("Realignment Order") and Kuepers subsequently objected [Docket No. 44] ("Objections"). For the reasons stated herein, State Auto's motions are granted, Kuepers's motion is denied, and Kuepers's Objections to Judge Brisbois's Realignment Order are overruled.

II. BACKGROUND[1]

A. Underlying State Court Action

In 1997, Kuepers Construction, a Minnesota corporation, began building a 24 unit townhome project in Crow Wing County, Minnesota (the "Project") in a development owned by Interlachen Propertyowners Association (the "Association"), a Minnesota non-profit corporation. Notice of Removal [Docket No. 1-1], Ex. A ("Compl.") ¶¶ 1-4. Kuepers concluded construction in 2001. Id . ¶ 5. Interlachen Properties LLC served as Kuepers's real estate manager and executed the sale of units to individual members of the Association. Id . ¶ 8. Kuepers maintained several insurance policies with State Auto, an Ohio corporation. Id . ¶¶ 2, 14.

Between 2004 and 2009, Kuepers performed periodic repairs of the buildings' siding. Id . ¶¶ 9-11. In 2010, the Association retained an expert to examine property damage at the Project. Id . ¶ 12. The expert informed the Association of multiple issues with the Project, including that the buildings' siding, windows, weather resistive barriers, poly-vapor barriers, and insulation were improperly installed. Id . The expert additionally found that the grading was improper, the project failed to meet certain building codes, and that widespread design and engineering defects contributed to the on-going issues at the property. Id.

As a result of the expert's findings, the Association commenced an action against Kuepers and Interlachen Properties LLC in Crow Wing County District Court. Id . ¶ 13. After receiving notice of the lawsuit, Kuepers's insurer, State Auto, retained counsel to defend against the claims at trial. Id . ¶¶ 15-24. After discovering additional design defects, the Association amended its complaint to bring additional claims for professional negligence and professional negligent design. Id . ¶ 16. Kuepers brought a motion for summary judgment seeking dismissal of the design negligence claim, and this motion was granted on January 4, 2013. Id . ¶ 17. Interlachen Properties LLC's motion for summary judgment was also granted on January 4, 2013. Notice of Removal in Interlachen Prop., LLC v. State Auto Ins. Co., 14-cv-4380 (JRT/LIB) [Docket No. 1-1], Ex. A ¶ 29.

Prior to trial of the remaining claims asserted against Kuepers, State Auto raised for the first time several coverage defenses in a new reservations of rights letter, claiming that these defenses limited or precluded Kuepers's coverage for certain damages. Id . ¶¶ 21-22. Based on the representations of the defense counsel retained by State Auto, Kuepers believed that its interests were protected. Id . ¶¶ 22-25. Following a jury trial, judgment was entered in favor of the Association against Kuepers in the amount of $2, 147, 000. Id . ¶¶ 26-28. The state court required that Kuepers post a supersedeas bond for the same amount, or face attachment of its assets to fulfill the judgment. Id . ¶ 29. State Auto's retained counsel initially advised Kuepers that it would post the supersedeas bond on Kuepers's behalf; however, State Auto subsequently refused to post the bond. Id . ¶¶ 30-31.

B. Miller-Shugart Agreements

In response to State Auto's "abandonment" of Kuepers, on July 28, 2014, Kuepers entered into a Miller-Shugart settlement agreement with the Association wherein Kuepers stipulated to the entry of judgment against it in exchange for the Association agreeing to pursue fulfillment of the judgment solely from State Auto ("Miller-Shugart agreement").[2] Id . ¶¶ 37-45; McCollum Aff. [Docket No. 6] Ex. 12. The Crow Wing County Court approved the settlement agreement and entered judgment for the Association in the amount of $2, 940, 875.15, reflecting the jury verdict amount and subsequent costs, disbursements, and interest. Id . ¶ 56; Tarasek Decl. [Docket No. 14] Exs. C, D. It is this Miller-Shugart agreement that is the subject of the instant action.

In addition to the above referenced agreement, the Association entered into two additional Miller-Shugart agreements. On August 28, 2014 the Association executed an agreement addressing the design claims with Kuepers concerning the James River Insurance Company ("James River"), Kuepers's other insurer. McCollum Aff. Ex. 13. The parties in this agreement stipulated to a judgment of $2, 000, 000. Id . James River commenced a declaratoryjudgment action in federal court against the Association and Kuepers related to this agreement. Id . Ex. 6. That action is also assigned to the undersigned. See James River Ins. Co. v. Interlachen Propertyowners Assoc,, 14-cv-3434 (ADM/LIB).

The Association also executed a third Miller-Shugart agreement on August 28, 2014 with Interlachen Properties LLC as to State Auto. McCollum Aff. Ex. 14. Interlachen Properties LLC thereafter commenced a declaratory judgment action in state court against the Association, Kuepers, and State Auto. Id . Ex. 17. On October 17, 2014, State Auto removed that action to federal court on the basis of diversity jurisdiction, asserting that Interlachen Properties LLC fraudulently named Kuepers and the Association as Defendants. Id . Ex. C. This action (the "Interlachen Properties LLC action") was assigned to the Honorable John R. Tunheim. See Interlachen Prop., LLC, 14-cv-4380 (JRT/LIB). On January 7, 2015, Judge Brisbois granted State Auto's Motion for Realignment and the parties were realigned so that Interlachen Properties LLC, the Association, and Kuepers are named as plaintiffs and State Auto is the sole defendant. Id . Ex. E. Interlachen Properties LLC's Motion to Remand and Objection to Judge Brisbois's Realignment Order are currently pending before Judge Tunheim.

The total of the stipulated judgments in the three Miller-Shugart agreements is $7, 000, 000.15. McCollum Aff. Exs. 12, 13, 14.

C. The Instant Action

Kuepers filed the instant action on December 3, 2014 in Crow Wing County District Court. Compl. The action originally named State Auto and the Association as defendants and asserts seven claims. Id . Count One seeks declaratory judgment against both State Auto and the Association, alleging that State Auto breached its obligation to Kuepers under its insurance policies and, as a consequence, State Auto must satisfy the $2, 940, 875.15 judgment entered pursuant to the Miller-Shugart agreement between Kuepers and the Association. Id . ¶¶ 51-56. The remaining counts are all asserted against State Auto based on its alleged failure to fulfill its obligations under the insurance policies and post a supersedeas bond in the state court action. These claims sound in breach of contract, breach of fiduciary duty, breach of the implied duty of good faith and fair dealing, estoppel, waiver, and reimbursement of attorneys' fees. Id . ¶¶ 57-92. The Association subsequently filed a cross-claim against State Auto for declaratory judgment and garnishment and a counterclaim against Kuepers for garnishment. Def. Interlachen Prop. Assoc., Inc.'s Answer, Cross-Cl., and Countercl. [Docket No. 10] ¶¶ 42-52.

On February 5, 2015, State Auto removed this case to federal court based on diversity of citizenship. Notice of Removal ¶ 4. In its notice of removal, State Auto claimed that the Association had been fraudulently joined as a defendant in an attempt to defeat federal diversity jurisdiction. Id . After the case's removal, State Auto filed Motions to Dismiss Kuepers's claims and the Association's cross-claims. Additionally, Kuepers filed a Motion to Remand the action back to state court.

On April 16, 2015, two days after this Court heard oral argument on State Auto's Motions to Dismiss and Kuepers's Motion to Remand, Magistrate Judge Leo L. Brisbois heard State Auto's Motion for Realignment. Min. Entry [Docket No. 42]. State Auto argued that the Association should be realigned as a plaintiff in this action "to reflect the parties' actual interests." State Auto's Mot. for Party ...


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