Paul Russell, Jr. v. Liberty Insurance Underwriters ( 2020 )

United States Court of Appeals
For the Eighth Circuit
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No. 18-2984
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Paul T. Russell, Jr.; J. Carson Cates
lllllllllllllllllllllPlaintiffs - Appellants
v.
Liberty Insurance Underwriters, Inc.
lllllllllllllllllllllDefendant - Appellee
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Appeal from United States District Court
for the Western District of Missouri - Kansas City
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Submitted: November 14, 2019
Filed: February 19, 2020
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Before SHEPHERD, GRASZ, and KOBES, Circuit Judges.
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GRASZ, Circuit Judge.
After Liberty Insurance Underwriters, Inc. removed this case to federal court,
Plaintiffs Paul T. Russell, Jr., and J. Carson Cates moved to remand. The district
court1 denied the motion. It later granted Liberty’s motion for summary judgment.
We affirm both decisions.
I. Background
A. Factual History
Paul Russell co-owned Cates Sheet Metal Industries, Inc., with Daniel and J.
Carson Cates.2 Daniel’s 2003 cancer diagnosis prompted the three shareholders to
create a succession plan. The company would purchase life insurance policies on
each shareholder. If a shareholder died, the company would use the insurance
proceeds to buy the deceased shareholder’s stock from his personal representative.
This plan was memorialized in two documents, which we will call the “Stock
Agreement.”
Daniel died on September 20, 2013. The company received the life insurance
proceeds and deposited the money into its bank account. But Daniel’s shares, held
by the Daniel J. Cates Revocable Trust, were never purchased. Elizabeth Cates —
Daniel’s widow, beneficiary, and personal representative — was never paid.
Elizabeth sued Russell and J. Carson for conversion and breach of fiduciary
duty in Kansas state court. The court ultimately found that Russell, as company
president, had breached his fiduciary duty. The court issued a judgment against
Russell for $822,900.77 plus interest.
1
The Honorable Gary A. Fenner, United States District Judge for the Western
District of Missouri.
2
Because Daniel, J. Carson, and Elizabeth Cates share a surname, we refer to
them by their given names.
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Russell and J. Carson had expected Liberty, their insurer, to defend and
indemnify them in the lawsuit. They had an insurance policy providing coverage for
liabilities related to their company duties. The policy provided three types of
coverage, two of which are relevant here: Directors, Officers and Company Liability
Coverage (“Directors & Officers Coverage”), and Fiduciary Liability Coverage
(“Fiduciary Coverage”). The policy purported to protect Russell and J. Carson from
business-related civil judgments and defense costs.
But Liberty refused to defend and indemnify them when Elizabeth sued. It
pointed to policy provisions allegedly excluding Russell and J. Carson’s conduct
from coverage. First, Liberty noted that both the Fiduciary and Directors & Officers
Coverage contained a “Personal Profit Exclusion.” In short, the policy would not
cover corporate officers from claims “based upon, arising out of, or attributable to . . .
gaining in fact any profit, remuneration or financial advantage” to which they are “not
legally entitled.” Because the life insurance proceeds eventually paid Russell and J.
Carson’s salaries, Liberty argued, Russell and J. Carson enjoyed financial advantages
to which they were not entitled. Under Liberty’s reading of the policy, Russell and
J. Carson’s liability and defense costs were not covered.
Second, Liberty noted that the Directors & Officers Coverage contained a
“Contract Exclusion.” According to the policy, Liberty has no duty to defend or
indemnify corporate officers against claims “[b]ased upon, arising out of, or
attributable to any actual or alleged liability under or breach of any contract or
agreement.” Elizabeth’s lawsuit alleged that Russell and J. Carson promised her, but
never delivered, Daniel’s life insurance proceeds. Because her claim was based on
this breach of contract, Liberty maintained, Russell and J. Carson should not expect
the Directors & Officers Coverage to help them.
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B. Procedural History
Russell and J. Carson sued Liberty in Missouri state court for bad-faith failure
to defend and indemnify. Elizabeth, as the Daniel J. Cates Revocable Trust, also
joined; she hoped to recover from Liberty the money she was owed from the earlier
lawsuit.
Liberty, a corporate citizen of Massachusetts and Illinois, removed the case to
federal court. None of the plaintiffs were Massachusetts or Illinois citizens: Russell
was a Missourian, J. Carson a Kansan, and the Trust (subsequent jurisdictional
discovery would show) enjoyed Arizona and Missouri citizenship. Diversity
jurisdiction seemed proper under 28 U.S.C. § 1332.
But Russell and J. Carson wanted the case back in state court, where they
originally filed their complaint. They explained why remand was necessary: in
“direct action[s]” against insurers, the insurer takes the citizenship of those it insures.
28 U.S.C. § 1332(c)(1). And if the Trust’s equitable garnishment claim against
Liberty is a direct action, then Liberty shares Russell’s Missouri citizenship.
Accordingly, complete diversity cannot exist because Missouri citizens are both
plaintiffs and defendants.
To determine whether the Trust’s equitable garnishment claim against Liberty
was a “direct action,” the district court examined the claim’s statutory basis: section
379.200 of the Missouri Revised Statutes. “Upon the recovery of a final judgment
against any [insured] person, firm or corporation,” the statute says, “the judgment
creditor may proceed in equity against the defendant and the [defendant’s] insurance
company to reach and apply the insurance money to the satisfaction of the judgment.”
Mo. Rev. Stat. § 379.200.
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The district court never resolved the direct-action question because
section 379.200’s language presented a more pressing problem. According to the
statute, if the Trust wanted Liberty to satisfy its judgment against Russell, it had to
sue both Russell and Liberty. In short, the Trust’s equitable garnishment claim
seemingly required Russell as a defendant, but Russell’s bad-faith claim required him
as a plaintiff. The parties’ then-present alignment (upon which Russell’s lack-of-
diversity argument depended) appeared legally impossible. Except in unusual
circumstances not relevant here, a party cannot be both plaintiff and defendant in the
same case. United States v. I.C.C., 337 U.S. 426, 430 (1949).
The district court came up with a solution. Citing its authority under Federal
Rule of Civil Procedure 21, it severed the suit into two separate actions. In the first
case, Russell and J. Carson could sue Liberty for bad-faith failure to defend and
indemnify; the Trust could separately sue Liberty and Russell in the second. Thus,
even if the Trust’s equitable garnishment claim was a direct action, Russell could not
be a plaintiff in it. Russell and J. Carson’s attempted return to state court was
thwarted.
The district court, exercising its now-apparent diversity jurisdiction over the
bad-faith claim, granted Liberty’s summary judgment motion. According to the
district court, the Fiduciary Coverage did not apply to the Stock Agreement because
the Stock Agreement was not an employee-benefit plan as contemplated by the
policy. And the Directors & Officers Coverage did not protect Russell and J. Carson
from liability arising out of contract breaches. Because their liability and defense
costs arose out of their failure to pay Elizabeth the contractually-promised proceeds
of Daniel’s life insurance, Russell and J. Carson could not count on Liberty to defend
or indemnify them under the Directors & Officers Coverage.
Russell and J. Carson now appeal, arguing that they were issued erroneous
orders by a court that never had jurisdiction to begin with.
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II. Analysis
A. Subject-Matter Jurisdiction
Russell and J. Carson argue that the district court should have remanded the
case to state court for lack of subject-matter jurisdiction. Subject-matter jurisdiction
is subject to de novo review. Gilbert v. Monsanto Co., 216 F.3d 695, 699 (8th Cir.
2000).
Federal district courts have “original jurisdiction of all civil actions where the
matter in controversy exceeds . . . $75,000. . . and is between citizens of different
States.” 28 U.S.C. § 1332(a)(1). Corporations are typically considered citizens of
both the state in which they are incorporated and the state in which they have their
principal place of business. 28 U.S.C. § 1332(c)(1). Here, the amount-in-controversy
requirement is met, and none of the plaintiffs share Liberty’s Massachusetts or Illinois
citizenship.
Russell and J. Carson point out that “in any direct action against the insurer of
a policy or contract of liability insurance, whether incorporated or unincorporated, to
which action the insured is not joined as a party-defendant, such insurer shall be
deemed a citizen of every State . . . of which the insured is a citizen.” Id. That is, if
the Trust’s equitable garnishment claim is a “direct action,” then Liberty shares
Russell’s Missouri citizenship. The result: no complete diversity and therefore no
federal jurisdiction.
Jurisdiction therefore hangs on whether the Trust’s equitable garnishment
claim — brought under section 379.200 — is a “direct action” under 28 U.S.C.
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§ 1332(c)(1).3 Federal district courts in Missouri have gone both ways on the issue.
See, e.g., Fleming v. Liberty Surplus Ins. Corp., No. 4:12–CV–1478 CDP, 2012 WL
6200526, at *1 (E.D. Mo. Dec. 12, 2012) (construing section 379.200 as a direct
action); Peterson v. Discover Prop. & Cas. Ins. Co., No. 11–6115–CV–SJ–ODS,
2012 WL 728353, at *2 (W.D. Mo. Mar. 6, 2012) (declining to interpret section
379.200 as a direct action). And the Missouri Supreme Court’s description of section
379.200 as a direct action in other contexts has no bearing on whether it is a direct
action as a matter of federal law. See Johnston v. Sweany, 68 S.W.3d 398, 403 (Mo.
2002) (calling a section 379.200 claim a “direct action”).
We agree with the Fourth Circuit’s recent holding that “direct action,” as used
in § 1332(c)(1), refers to “a suit in which the plaintiff sues a wrongdoer’s liability
insurer without joining or first obtaining a judgment against the insured.” Gateway
Residences at Exch., LLC v. Ill. Union Ins. Co., 917 F.3d 269, 272 (4th Cir. 2019)
(citing decisions from the First, Second, Sixth, Seventh, Ninth, and Eleventh Circuits
likewise interpreting § 1332(c)(1)’s “direct action” provision narrowly). As the
Gateway court explained, Congress created the “direct action” provision in
§ 1332(c)(1) in response to Wisconsin and Louisiana laws permitting claims against
a tortfeasor’s insurer without simultaneously suing the tortfeasor or obtaining a prior
judgment against him. Id. at 272–73. Congress took issue with how, under those
3
The statute permits a judgment creditor’s recovery for “loss or damage on
account of bodily injury or death, or damage to property if the defendant in such
action was insured against said loss or damage.” Mo. Rev. Stat. § 379.200. It is
unclear whether monetary losses caused by a fiduciary-duty breach constitute
“damage to property.” But Liberty does not presently challenge the statute’s
application, and the Missouri Supreme Court has entertained possible section 379.200
claims in other cases where only monetary loss was at issue. See Taylor v. Bar Plan
Mut. Ins. Co., 457 S.W.3d 340, 343–44 (Mo. 2015) (acknowledging a potential
section 379.200 claim following a legal-malpractice judgment).
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laws, a plaintiff’s state-law claim against a local tortfeasor’s out-of-state insurer often
wound up in federal court. Id. at 272 (citing S. Rep. 88-1308 (1964)). Compare that
to section 379.200 of the Missouri Revised Statutes, which ostensibly requires both
obtaining a prior judgment against the tortfeasor and joining him to the suit.
Obtaining a prior judgment takes state-law tort claims off the table; joining a local
tortfeasor to the suit destroys diversity. A claim brought under section 379.200 is
therefore not a direct action under § 1332(c)(1).
Russell and J. Carson reject this conclusion. Quoting Prendergast v. Alliance
General Insurance Company, they argue the suit is a direct action because
“Missouri’s equitable garnishment statute essentially does in two steps what the
Louisiana statute . . . did in one . . . .” 921 F. Supp. 653, 655 (E.D. Mo. 1996). But
the extra step matters. Obtaining a prior judgment or joining a local tortfeasor
prevents the ill Congress sought to remedy with § 1332(c)(1)’s “direct action”
provision, namely, federal litigation of state-law tort claims establishing a local
tortfeasor’s liability. And this is true even if Missouri courts occasionally let slide the
failure to join the tortfeasor as a defendant. See, e.g., Mazdra v. Selective Ins. Co.,
398 S.W.2d 841, 845–46 (Mo. 1966) (declining to reverse when plaintiff’s failure to
join the tortfeasor is raised for the first time on appeal).
Because section 379.200 is not a direct action, complete diversity exists. The
district court therefore had jurisdiction over Russell and J. Carson’s bad-faith claim
against Liberty.4
4
Russell and J. Carson also argue that the district court abused its discretion by
resolving the jurisdictional question with a Rule 21 severance. See Fed. R. Civ. P.
21 (“[O]n its own, the court may at any time, on just terms, add or drop a party. The
court may also sever any claim against a party.”). But we need not decide whether
a jurisdiction-generating Rule 21 severance is an abuse of discretion. Because
section 379.200 is not a direct action, the district court had subject-matter jurisdiction
all along. Given the statute’s language apparently requiring Russell as a defendant,
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B. Summary Judgment
According to Russell and J. Carson, Liberty should have protected them from
Elizabeth’s lawsuit. They argue that both the Fiduciary Coverage and the Directors
& Officers Coverage protect them from liability and defense costs. The district court
disagreed; it found that the Directors & Officers Coverage excluded Russell and J.
Carson’s conduct from coverage, and that the Fiduciary Coverage did not apply.
“We review a grant of summary judgment de novo, ‘viewing the record most
favorably to the nonmoving party and drawing all reasonable inferences for that
party.’ We also review the district court’s construction of an insurance policy and
interpretation of state law de novo.” Philadelphia Consol. Holding Corp. v. LSI-
Lowery Sys., Inc., 775 F.3d 1072, 1076 (8th Cir. 2015) (citation omitted) (quoting
Munroe v. Cont’l W. Ins. Co., 735 F.3d 783, 786 (8th Cir. 2013)).
The parties agree that Kansas law applies. If an insurance policy’s “language
is clear and unambiguous, it must be taken in its plain, ordinary, and popular sense.”
First Fin. Ins. Co. v. Bugg, 962 P.2d 515, 519 (Kan. 1998). Courts “should not strain
to create an ambiguity where, in common sense, there is none.” Id. Whether a policy
is ambiguous depends on “what a reasonably prudent insured would understand the
language to mean.” Id. “Generally, exceptions, limitations, and exclusions to
insurance policies require narrow construction,” and absent clear and unambiguous
coverage limitations, “the insurance policy will be liberally construed in favor of the
insured.” Marquis v. State Farm Fire & Cas. Co., 961 P.2d 1213, 1220 (Kan. 1998).
this court’s Glover v. State Farm decision suggesting the same, and Russell’s then-
current role as plaintiff, the district court properly exercised its discretion. See Glover
v. State Farm Fire & Cas. Co., 984 F.2d 259, 261 (8th Cir. 1993) (affirming dismissal
of a section 379.200 claim based on the failure to also sue the tortfeasor).
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We turn to the Directors & Officers Coverage first. The policy excludes from
coverage liability or defense costs “[b]ased upon, arising out of, or attributable to any
actual or alleged liability under or breach of any contract or agreement.” Given the
company’s broken promise to pay Daniel’s life-insurance proceeds to Elizabeth, it
seems that Liberty has no duty to cover Russell and J. Carson’s liability and defense
costs.
According to the Kansas Supreme Court, however, “where the insured’s
liability [is] premised upon a legal theory separate and distinct from the liability
excluded by the policy, the policy provide[s] coverage for that claim.” Marquis, 961
P.2d at 1222. Russell and J. Carson assert that is what happened here: the policy
excludes coverage for contract breaches, but Elizabeth sued them for conversion and
breach of fiduciary duty. She did not sue for breach of contract. Under the Marquis
rule, they argue, the policy should cover Russell and J. Carson.
But we do not think Marquis applies. The Kansas Supreme Court has noted
the Marquis rule’s increasing disfavor. Crist v. Hunan Palace, Inc., 89 P.3d 573, 578
(Kan. 2004) (finding the authority supporting Marquis “distinguished almost out of
existence”). And the rule typically only applies in negligent-entrustment,
-supervision, or -hiring cases. See Marquis, 961 P.2d at 1222–23 (holding that a
policy’s automobile exclusion does not exclude negligent supervision/hiring); see
also Catholic Diocese of Dodge City v. Raymer, 840 P.2d 456, 457, 460–61 (Kan.
1992) (holding that a policy covers negligent supervision, even if a supervisee’s
intentional acts are not covered).5
5
Some federal courts have nonetheless applied Marquis in other contexts. See,
e.g., Cont’l Cas. Co. v. MultiService Corp., No. 06–2256–CM, 2009 WL 1788422,
at *3 (D. Kan. June 23, 2009) (applying Marquis to a tortious-interference claim).
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In fact, several Kansas cases hold that “theories of liability are irrelevant when
injuries occur from intentional acts.” State Farm Ins. Cos. v. Gerrity, 968 P.2d 270,
272–73 (Kan. App. 1998) (noting an exception for Raymer-type cases involving
negligent entrustment, supervision, or hiring); see also Bugg, 962 P.2d at 526 (“[T]he
theory of liability is irrelevant when the injuries arose out of an assault and battery.”);
Crist, 89 P.3d at 579–80 (acknowledging, without disapproving, Gerrity and Bugg
when upholding Marquis in automobile-exception cases). If Marquis applied to
contract-breach exclusions, someone could intentionally obtain the benefit of a
breached contract and — depending on the plaintiff’s legal theory — force his insurer
to carry the burden. A prudent insured person would not understand the policy to
permit such windfalls. And neither (we predict) would the Kansas Supreme Court.
Therefore, the Directors & Officers Coverage does not cover Russell and J. Carson’s
conduct.
We can now turn to the Fiduciary Coverage, which protects Russell and J.
Carson from liability caused by misdeeds done “in the discharge of their duties in
their capacities, or solely by reason of their status, as fiduciaries of any Plan” or —
in the case of negligence — “solely in the Administration of any Plan.” A “Plan,”
according to the insurance policy, is any “employee benefit plan or program . . .
sponsored solely by the Company for the benefit of the employees of the Company.”
Russell and J. Carson claim that the Stock Agreement is a “Plan” under the
policy. After all, they planned the Stock Agreement transactions for the benefit of
Cates Sheet Metal employees (specifically, for Russell, J. Carson, and Daniel). And
Elizabeth sued them for how they discharged their fiduciary duties. They therefore
maintain that the Fiduciary Coverage — to which there is no contract-breach
exclusion — covers their liability and defense costs.
We are not persuaded. The Stock Agreement benefitted primarily company
shareholders; its effect on employees is accidental. Employment at Cates Sheet Metal
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is not required (or even implicitly mentioned) by the Stock Agreement. We therefore
find the Stock Agreement is not a “Plan” under the policy. Moreover, the Fiduciary
Coverage only applies to misdeeds done “in the discharge of [Russell and J. Carson’s]
duties in their capacities, or solely by reason of their status, as fiduciaries of any
Plan.” But Russell and J. Carson’s liability was independent of whether the Stock
Agreement qualifies as a “Plan” under the policy.6 They were not sued for breaching
their duties as employee-benefit-plan fiduciaries; they were sued (and Russell found
liable) for breaching their duties as fiduciaries of the company and its shareholders.
We therefore conclude that the Fiduciary Coverage does not apply.
The district court rightly granted Liberty’s motion for summary judgment.
III. Conclusion
The district court had jurisdiction to grant Liberty’s motion for summary
judgment. And it was right to do so. We affirm both the denial of remand and the
grant of summary judgment.
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6
This is consistent with our understanding of Marquis, which requires that
exclusions to coverage be explicitly stated within the policy. Marquis, 961 P.2d at
1220. We are not examining a coverage exclusion here.
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