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Selective Insurance Co. of South Carolina v. Sela

United States District Court, D. Minnesota

April 26, 2018

Selective Insurance Company of South Carolina, Plaintiff/Counter-defendant,
Amit Sela, Defendant/Counter-claimant.

          Kristi K. Brownson and Aaron M. Simon, Esqs., Brownson Norby, PLLC, Minneapolis, Minnesota, for Plaintiff.

          Christopher H. Yetka, Esq., Barnes & Thornburg LLP, Minneapolis, Minnesota, for Defendant.



         The above-captioned case comes before the undersigned on Defendant Amit Sela's (“Sela”) Motion for Leave to Amend Counterclaims and Add Claim for Bad Faith Under Minn. Stat. § 604.18 (“Motion to Amend”) [Doc. No. 88]. This matter has been referred for the resolution of pretrial matters pursuant to 28 U.S.C. § 636(b)(1) and District of Minnesota Local Rule 72.1. For the reasons stated below, the Court grants Sela's Motion to Amend.

         I. BACKGROUND

         Sela is the policy holder of a homeowners' insurance policy (the “Policy”) that Selective issued to cover the period of July 27, 2014, to July 27, 2015. (Second Am. Compl. & Jury Demand, “Second Am. Compl.”) [Doc. No. 34 ¶ 7]. The Policy covers a residence in Minnetonka, Minnesota (the “Property”), which Sela owns. (Id. ¶ 3).

         On July 8, 2015, Sela reported that the Property's roof was damaged in a June 29, 2015, hail storm. (Id. ¶ 15). No party disputes that the Property suffered damage from the hail storm. Instead, the issue in this lawsuit is whether the terms of an exclusion in the Policy regarding an insured's intentional concealment or misrepresentation allows Selective to avoid paying Sela's claim. See (id. ¶ 33).

         As part of this dispute, Sela filed his Answer to Second Amended Complaint and Counterclaims (“Answer & Counterclaims”) [Doc. No. 37]. Relevant to the motion before the Court, Sela reiterated that “there is no dispute that the 2015 storm caused at least some property damage.” (Answer & Countercls. ¶ 60). Furthermore Sela asserted that the insurance policy at issue “contain[ed] an Appraisal provision stating: If you and we fail to agree on the amount of loss, either may demand an appraisal of the loss.” (Id. ¶ 65) (internal quotation marks omitted). “In this event, each party will choose a competent and impartial appraiser within 20 days after receiving a written request from the other.” (Id.). If the appraisals differ, they are submitted to an umpire-agreed upon by the appraisers-who will adjudicate the dispute. See (id.). “After receiving Selective's [notification that it was denying Sela's claim, ] Mr. Sela made a written demand for appraisal for the loss. Selective refused to participate in such appraisal.” Sela requested the appraisal after Selective filed this lawsuit, but at no time did Selective inform Sela that it was declining coverage until it filed its Complaint. See (Order Dated Oct. 10, 2017) [Doc. No. 85 at 5] (“December 2, 2016: Selective notified Sela, through counsel, that it is denying Sela's claim and initiated the instant lawsuit. (Email, Ex. G, Yetka Decl. - 57) [Doc. No. 57-1 at 55]; see also (Compl. & Jury Demand) [Doc. No. 1].”) (Id. ¶ 66). Selective instead filed this lawsuit on December 2, 2016, seeking to avoid payment under the Policy. See generally (Compl. & Jury Demand) [Doc. No. 1].

         Sela now moves the Court to amend his Answer and Counterclaims to add a claim for bad faith denial of insurance coverage in violation of Minnesota Statutes section 604.18. See (Am. Answer to Second Am. Comp. & Countercls., “Am. Answer & Countercls.”) [Doc. Nos. 68-1, 68-2] (proposed Amended Answer and Counterclaims and a redlined version showing differences between the Answer and Counterclaims and the Amended Answer and Counterclaims, respectively). Sela's proposed amendments are directed solely to the addition of his counterclaim for bad faith denial of insurance coverage. See generally (Am. Answer & Countercls.) (adding paragraphs eighty-two to ninety-one to incorporate a counterclaim for bad faith denial of insurance coverage).

         “Recent decisions in this District for adding claims for punitive damages under a similar standard in Minnesota Statutes section 549.191 have yielded different results using the framework articulated in Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 559 U.S. 393 (2010).” (Text Only Order Dated Apr. 9, 2018) [Doc. No. 107]. In light of these different results, the Court requested “that the parties submit supplemental briefing as to whether Sela's Motion to Amend-in light of Shady Grove-should be analyzed under Rule 15 of the Federal Rules of Civil Procedure or Minnesota Statute section 604.18.” Id.

         In the supplemental briefing, both parties agree that section 604.18 should control Sela's Motion to Amend. See (Def.'s Br. Responding to Apr. 8, 2018 Order, “Sela's Suppl. Br.”) [Doc. No. 109]; (Pl. Selective Insurance Company of South Carolina's Suppl. Mem. of Law on the Legal Standard Applicable to Def.'s Mot. to Amend to Add a Claim for Bad Faith, “Selective's Suppl. Br.”) [Doc. No. 110]. In particular, both parties assert that Rule 15 and section 604.18 can co-exist, in large part, because Rule 15 is “discretionary.” See, e.g., (Sela's Suppl. Br. at 1, 3, 5- 6); (Selective's Suppl. Br. at 4-9). Both parties assert that “[i]f Minn. Stat. § 604.18, subd. 4 ‘and Minnesota Rule 15.01 can both apply in the state court for their separate purposes, so too, section [604.18, subd. 4] and Federal Rule 15(a) may both apply in federal court in a diversity action.'” See (Sela's Suppl. Br. at 4) (quoting Sec. Sav. Bank v. Green Tree Acceptance, Inc., Civ. No. 3-89-28 (BPB/DDA), 1990 WL 36142, *2 (D. Minn. Mar. 22, 1990) (Becker, Mag. J.) (alterations in original)); see also (Selective's Suppl. Br. at 7 n.4). Furthermore, both parties raised concerns about potential forum shopping in support of their respective conclusions. See (Sela's Suppl. Br. at 2); (Selective's Suppl. Br. at 10-12). Understandably, despite the similarities in their arguments related to what standard to apply, the parties disagree as to the outcome of applying Rule 15 or section 604.18. See (Sela's Suppl. Br. at 6-7); (Selective's Suppl. Br. at 12-15).


         As stated earlier, the initial issue before this Court is what legal standard controls amendments to the pleadings in a diversity case: Rule 15 of the Federal Rules of Civil Procedure or Minnesota Statute section 608.14. Rule 15 governs amendments of pleadings generally in federal cases and specifies that the court “should freely give leave when justice so requires.” Fed.R.Civ.P. 15(a). By contrast, Minnesota Statute section 608.14 governs situations in which a party wishes to add a claim for bad faith denial of insurance coverage in Minnesota state court and requires that the moving party establish, by prime facie evidence, that the nonmoving party is liable under the statute. See Minn. Stat. § 604.18, subdivs. 2, 4. More specifically, section 608.14 requires that amendments “must be accompanied by one or more affidavits showing the factual basis for the motion.” Id. subdiv. 4.

         The Court understands that because it has diversity jurisdiction, the law of Minnesota generally applies. See, e.g., Prudential Ins. of Am. v. Kamrath, 475 F.3d 920, 924 (8th Cir. 2007) (stating that generally “[a] district court sitting in diversity applies the law . . . of the state in which it sits.” (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941))). But,

[w]hen a situation is covered by one of the Federal Rules, . . . the court has been instructed to apply the Federal Rule, and can refuse to do so only if the Advisory Committee, this Court, and Congress erred in their prima facie judgment that the Rule in question transgresses neither the terms of the Enabling Act nor constitutional restrictions.

Hanna v. Plumer, 380 U.S. 460, 471 (1965); see also Burlington N. R.R. v. Woods, 480 U.S. 1, 4-5 (1987) (“The initial step is to determine whether, when fairly construed, the scope of [the] Federal Rule . . . is sufficiently broad to cause a direct collision with the state law or, implicitly, to control the issue before the court . . . .” (internal quotation marks omitted)). More recently, in Shady Grove, the Supreme Court provided additional clarification regarding its holdings in Hanna and Burlington N. R.R., stating that a court “must first determine whether [the Federal Rule] answers the question in dispute.” 559 U.S. at 398. In light of Shady Grove, the question thus becomes whether the framework for considering amendments embodied in Rules 8, 9, 12, and 15 “answers the question” of whether Sela may amend his Answer and Counterclaims and if it does, whether Rules 8, 9, 12, and 15 are valid in view of the Rules Enabling Act, codified at 28 U.S.C. § 2072, or other constitutional restrictions. See id.

         The issue of a section 604.18 amendment parallels the procedure for amending pleadings under Minnesota Statutes section 549.191, governing amendments to add punitive damages claims under Minnesota law. Courts in this District have routinely applied the requirements of section 549.191 and not the Federal Rules in diversity cases. See In re Bair Hugger Forced Air Warming Devices Prods. Liab. Litig., MDL No. 15-2666 (JNE/FLN), 2017 WL 5187832, at *1 n.1 (D. Minn. July 27, 2017) (Noel, Mag. J.) (citing cases). Section 604.18 is more recently enacted than its punitive-damages sister statute. Compare generally Minn. Stat. § 549.191 (enacted in 1986), with Minn. Stat. § 604.18 (enacted in 2008). Nevertheless, like section 549.191, courts in this District have held that section 604.18 controls in the context of motions to amend pleadings.[1] This Court is not aware of any court in this District addressing Shady Grove when determining whether the Federal Rules of Civil Procedure or section 604.18 controls when a party seeks to add a claim for bad faith. The only cases of which this Court is aware that makes mention of a potential conflict with the Federal Rules of Civil Procedure are Brown, 2013 WL 12308196, and Gordon v. State Farm Fire & Cas. Co., No. 11-cv-3176 (JRT/LIB), 2012 WL 3848409 (D. Minn. Aug. 17, 2012) (Brisbois, Mag. J.), which addressed a related issue of whether to grant a motion to strike. See Gordon, 2012 WL 3848409 at *1, 5. The analysis in Gordon, however, is premised largely on decisions in this District predating Shady Grove under section 549.191 and not in light of Shady Grove itself. See Gordon, 2012 WL 3848409, at *3 n.3. Likewise, the analysis in Brown does not consider a potential conflict between the Federal Rules and section 604.18 under Shady Grove. See Brown, 2013 WL 12308196 at *2.

         Furthermore, the Court notes that recent decisions in this District have reached opposite results when considering whether Rule 15 or section 549.191 controls. Compare In re Bair Hugger, 2017 WL 5187832 (finding the court must apply Rule 15 of the Federal Rules of Civil Procedure), with Order Dated Mar. 8, 2018, Inline Packaging, LLC v. Graphic Packaging Int'l, LLC, No. 15-cv-3183 (ADM/LIB) (D. Minn.) [Doc. No. 534] (Brisbois, Mag. J.) (finding the court must apply Minn. Stat. § 549.191). These differing opinions on the related issue of whether Rule 15 or section 549.191 controls in view of Shady Grove prompted this Court to consider the question of whether the Federal Rules or section 604.18 controls.

         This Court concludes the relevant Federal Rules “answer[] the question in dispute” and control in this instance. Furthermore, there is nothing to suggest that these rules run afoul of the Rules Enabling Act or any constitutional provisions that render them invalid. The Court addresses each prong of this analysis in turn.

         A. Federal Rules Control

         As mentioned above, Rule 15 applies when a party seeks to amend a pleading in federal court. Rule 15 does not exist in a vacuum. Rule 15 answers the question of when and what standard governs the amendments of a pleading, and Rules 8 and 9 dictate the requirements of pleading generally and specifically. That is,

There can be no dispute that our modern rules of civil procedure are based on the concept of “simplified notice pleading, ” Conley v. Gibson, 355 U.S. 41, 47 (1957), and that “[a]ll pleadings shall be so construed as to do substantial justice.” Fed.R.Civ.P. 8(f). This can indeed be seen in the basic requirements for a claim for relief as set forth in Rule 8(a), and in the dictate of Rule 15(a), which states that a court shall grant a party leave to amend a complaint “freely . . . when justice so requires.” Fed.R.Civ.P. 15(a); see also Moore v. City of Paducah, 790 F.2d 557, 559 (6th Cir. 1986). This fundamental tenor of the Rules is one of liberality rather than technicality, and it creates an important context within which we decide cases under the modern Federal Rules of Civil Procedure.

Miller v. Am. Heavy Lift Shipping, 231 F.3d 242, 247-48 (6th Cir. 2000) (footnote omitted); see also 5 Charles A. Wright, Arthur R. Miller, & Mary Kay Kane, Federal Practice and Procedure § 1203 (3d ed. 2017) (stating there is a “strong nexus between Rule 8 and . . . Rule 9 (pleading special matters), . . . [and] Rule 15 (amended and supplemental pleadings”); cf. Fed. R. Civ. P. 15 advisory committee's note to 1991 amendment (stating that Rule 15's relation back provision was amended because “Schiavone v. Fortune[, 477 U.S. 21 (1986)] . . . was inconsistent with the liberal pleading practices secured by Rule 8”). Because issues surrounding the application of Rule 15 are better understood in the context of Rules 8, 9, and 12, the Court first discusses all four federal rules and then compares them to section 604.18.

         1. Rules 8, 9, and 12

         Rule 8 requires “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8. Rule 8's “notice pleading” is designed to “to give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotation marks omitted) (omission in original). “The liberal notice pleading of Rule 8(a) is the starting point of a simplified pleading system, which was adopted to focus litigation on the merits of a claim.” Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514 (2002). These relaxed pleading standards are designed to be inclusive and reduce the frequency by which litigants are prevented from bringing their claims. See Twombly, 550 U.S. at 575. Specifically, Rule 8's “drafters intentionally avoided any reference to ‘facts' or ‘evidence' or ‘conclusions.'” Id.

         That said, Rule 8's liberal standard is circumscribed in two primary ways. The first is through application of Rule 9, specifying that certain matters must be pleaded differently than what Rule 8 generally requires. See Fed. R. Civ. P. 8, 9. An example in which Rule 9 may limit Rule 8's liberal standard is the “particularity” requirement when pleading “circumstances constituting fraud or mistake.” See Fed. R. Civ. P. 9(b). This does not mean, however, that Rule 9 fundamentally alters notice pleading. To the contrary, the Court “must interpret the requirements of Rule 9(b) in harmony with the principles of notice pleading.” Abels v. Farmers Commodities Corp., 259 F.3d 910, 920 (8th Cir. 2001) (internal quotation marks omitted). For example, with respect to Rule 9(b), “[t]he special nature of fraud does not necessitate anything other than notice of the claim; it simply necessitates a higher degree of notice, enabling the defendant to respond specifically, at an early stage of the case, to potentially damaging allegations of immoral and criminal conduct.”[2] Id.

         The second way in which Rule 8's liberal notice standard is constrained is through the requirements set forth in Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Twombly-which address Rule 8's requirements in the context of a motion to dismiss under Rule 12. See, e.g., Twombly, 550 U.S. at 554-58 (discussing Rule 8 in the context of Rule 12(b)(6)). Specifically, these cases stand for the general proposition that Rule 8 “does not require ‘detailed factual allegations, '” but claims “must [nevertheless] contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 566 U.S. at 678 (quoting Twombly, 550 U.S. at 555, 570). That is, “[a] pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement.” Id. (internal quotation marks omitted) (citations omitted) (second alteration in original). Furthermore, there are others ways in which a pleading can be challenged under Rule 12.

For example, the form and sufficiency of a statement of a claim for relief under Rule 8(a)(2) may be tested by a motion to dismiss for failure to state a claim upon which relief can be granted, Rule 12(b)(6), by a motion for judgment on the pleadings, Rule 12(c), by a motion for a more definite statement, Rule 12(e), or by a motion to strike redundant, immaterial, impertinent, or scandalous matter, Rule 12(f).

5 Wright, Miller, & Kane, supra, § 1203.[3]

         2. Rule 15

         In light of Rules 8, 9, and 12, Rule 15 provides its own liberal provision under which federal courts review motions for leave to amend. See Paul D. Carrington, “Substance” and “Procedure” in the Rules Enabling Act, 1989 Duke L.J. 281, 310 (“The forgiving spirit of Rule 8 required the liberal amendment provision of Rule 15(a) . . . .”). Specifically, under Rule 15, leave to amend counterclaims “should [be] freely give[n] . . . when justice so requires.” Fed.R.Civ.P. 15(a); id. advisory committee's note to 2009 amendment (stating that Rule 15 is “the sole rule governing amendment of a pleading to add a counterclaim”); see also Trim Fit LLC v. Dickey, 607 F.3d 528, 531-32 (8th Cir. 2010) (analyzing a motion to amend to add a counterclaim under Rule 15). Nonetheless, leave to amend a counterclaim should not be given when there is “undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment[.]” See Foman v. Davis, 371 U.S. 178, 182 (1962) (stated in the context of a Rule 15 amendment to a complaint). As such, Rule 15 espouses the liberal standard that amendments should be allowed, unless certain limited exceptions are present. See id.

         An example of this liberal standard at work can be seen under the futility analysis. Under this framework, “[d]enial of a motion for leave to amend on the basis of futility means the district court has reached the legal conclusion that the amended [pleading] could not withstand a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure.” Zutz v. Nelson, 601 F.3d 842, 850 (8th Cir. 2010) (internal quotation marks omitted). Under 12(b)(6), the pleading “must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 678 (internal quotation marks omitted) (emphasis added). “A claim has facial plausibility” where there is sufficient “factual content [pleaded] that allows the court to draw the reasonable inference that [a party] is liable for the misconduct alleged.” Id. (internal quotation marks omitted). That is, analysis under Rules 15 and 12(b)(6) generally requires a court not consider matters outside the pleadings to determine whether leave to amend should be given. See, e.g., Arias, 2013 WL 12145854, at *2 (stating “[n]o matters outside the pleading may be considered” when conducting a futility analysis under Rules 12(b)(6) and 15 (citing Casazza v. Kiser, 313 F.3d 414, 417 (8th Cir. 2002))); cf. Hamm v. Rhone-Poulenc Rorer Pharm., Inc., 187 F.3d 941, 948 (8th Cir. 1999) (“Rule 12(b)(6) itself provides that when matters outside the pleadings are presented and not excluded by the court, the motion [to dismiss] shall be treated as one for summary judgment and disposed of as provided in Rule 56.”).

         This liberal standard can also be viewed from the standpoint of the interplay between Rule 8 and Rule 12(b)(6). See, e.g., Brooks v. Midwest Heart Group, 655 F.3d 796, 801 (8th Cir. 2011) (“Considered through the appropriate prism of Rule 12(b)(6), there is no doubt that, as to Brooks's claims of race and sex discrimination, the statement in Brooks's complaint . . . was sufficient to meet the liberal pleading standard of Rule 8(a).”). That is, under Rule 15, leave to amend should be freely given, so long as an amendment is pleaded with sufficient specificity “to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 678; see also Fed. R. Civ. P. 8, 12, 15. As a corollary to the interplay between Rule 8 and 15, under Rule 9, a claim still must meet the facial plausibility standard, but that standard differs depending on the claim asserted. See Fed. R. Civ. P. 9; Abels, 259 F.3d at 920 (stating that Rule 9 does not change the notice pleading paradigm, only that certain claims under Rule 9 require “a higher degree of notice” to demonstrate facial plausibility).

Rule 15 reflects two of the most important policies of the federal rules. First, the rule's purpose is to provide maximum opportunity for each claim to be decided on its merits rather than on procedural technicalities. This is demonstrated by the emphasis Rule 15 places on the permissive approach that the district courts are ...

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