Joseph Koehnen v. Rachel Paul

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No. 95-2142
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Joseph L. Koehnen, *
*
Plaintiff - Appellant, *
*
v. *
* Appeal from the United States
Herald Fire Insurance Company, * District Court for the
* District of Minnesota.
Defendant/Garnishee - *
Appellee, *
*
Rachel Sarah Paul, *
*
Defendant. *
___________
Submitted: December 14, 1995
Filed: July 11, 1996
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Before BOWMAN and LOKEN, Circuit Judges, and WOLLE,* Chief District Judge.
___________
LOKEN, Circuit Judge.
When a liability insurer denies coverage and refuses to defend its
insured, Minnesota law allows the plaintiff-claimant and the defendant-
insured to enter into a "Miller-Shugart" settlement, collectible only from
the insurer. The plaintiff then proceeds against the insurer by a
garnishment action, seeking to establish coverage and collect the
settlement. See Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982). In this
case, Joseph Koehnen is the
*
The HONORABLE CHARLES R. WOLLE, Chief United States District
Judge for the Southern District of Iowa, sitting by designation.
personal injury plaintiff. He entered into a Miller-Shugart settlement
with defendant Rachel Paul, collectible only from the proceeds of the
homeowner's insurance policy issued by Herald Fire Insurance Company to
Rachel's mother. When Koehnen proceeded by garnishment action in Minnesota
state court, Herald Fire removed. The district court1 denied Koehnen's
motion to remand the action to state court and affirmed the magistrate
judge's2 decision denying Koehnen leave to file a garnishment complaint
because the settlement is unreasonable. Koehnen appeals both rulings,
which terminated the removed action. We affirm.
I. Background.
Rachel Paul's parents divorced in 1988. The divorce decree provides
that Rachel's mother has legal custody of Rachel, that her parents "share
the parental responsibility," and that Florida is her "primary physical
residence." Rachel moved with her mother to Florida in 1988 but returned
to Minnesota in 1989 to complete high school. While in Minnesota, Rachel
lived with her father. She visited her mother in Florida from time to time
before completing high school in 1992, including a two-month summer visit
in 1990. On September 20, 1991, Rachel hosted a party at her father's
home, providing two kegs of beer and selling cups to those who attended.
Three underaged, beer-drinking guests attacked Koehnen, who was visiting
a neighbor, inflicting permanent head injuries. Koehnen sued Rachel, her
father and mother, the assailants, and their parents in Minnesota state
court.
Koehnen sought damages from Rachel and her parents under the
Minnesota Civil Damages Act, Minn. Stat. Ann. § 340A.801, subd. 1
1
The HONORABLE RICHARD H. KYLE, United States District Judge
for the District of Minnesota.
2
The HONORABLE ANN D. MONTGOMERY, United States Magistrate
Judge for the District of Minnesota.
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(also known as the Dram Shop Act), on the ground that Rachel illegally sold
liquor to the assailants. Mr. Paul's insurer agreed to defend Rachel and
her father. Herald Fire agreed to defend its named insured, Rachel's
mother, but declined to defend Rachel, claiming that she was not a policy
"insured." Herald Fire's letter declining to defend noted that Rachel was
being defended by her father's insurer.
Without Herald Fire's participation, Rachel and Koehnen settled his
claim against Rachel by stipulating to the entry of judgment in the amount
of $325,000 to be satisfied "from insurance coverage available to Rachel
Paul under the [Herald Fire] policy." Judgment was entered in accordance
with this Stipulation in state court. Now a judgment creditor, Koehnen
served a garnishment summons on Herald Fire. See Minn. Stat. Ann.
§ 571.72, subd. 2. When Herald Fire denied liability, Koehnen moved for
leave to file a supplemental garnishment complaint to recover his judgment
against Rachel from Herald Fire. See Minn. Stat. Ann. § 571.75. Herald
Fire removed the garnishment action before the state court ruled. See
Randolph v. Employers Mut. Liab. Ins. Co., 260 F.2d 461, 463-64 (8th Cir.
1958) (as a matter of federal law, garnishment is a separate proceeding for
removal purposes), cert. denied, 359 U.S. 909 (1959); 1A James W. Moore &
Brett A. Ringle, Moore's Federal Practice ¶ 0.167[12.--3], at 526-27 (2d
ed. 1996).
II. The Remand Issue.
A notice of removal "shall be filed" within thirty days after
defendant receives "a copy of the initial pleading setting forth the claim
for relief upon which such action or proceeding is based." 28 U.S.C.
§ 1446(b). Herald Fire filed its notice of removal on January 3, 1995,
more than thirty days after it received Koehnen's November 1994 garnishment
summons, but within thirty days
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of receiving Koehnen's motion for leave to file a supplemental complaint
in the state court.
A party objecting to removal must file a motion to remand "within 30
days after the filing of the notice of removal." 28 U.S.C. § 1447(c).
Within thirty days after Herald Fire removed, Koehnen filed a motion to
remand on the ground that removal was untimely. However, nine days
earlier, Koehnen had moved the district court for leave to file a
supplemental complaint against Herald Fire.3 Koehnen vigorously argued
that motion, and Magistrate Judge Montgomery ruled in Herald Fire's favor
before the district court heard Koehnen's motion to remand. In these
circumstances, the court held that Koehnen had waived his right to seek
remand. The court explained: "Having received an adverse ruling in
federal court [from Magistrate Judge Montgomery], pursuant to his own
motion, Koehnen will not be allowed to obtain a 'second bite at the apple'
in state court. . . . Based on Koehnen's affirmative federal court
conduct, remand in this matter would be offensive to fundamental principles
of fairness." We agree.
A procedural defect in removal, such as untimeliness, does not affect
the federal court's subject matter jurisdiction and therefore may be
waived. See Nolan v. Prime Tanning Co., 871 F.2d 76, 78 (8th Cir. 1989).
Federal courts consider a number of factors in determining whether a party
has waived its right to seek remand. See Midwestern Distrib., Inc. v.
Paris Motor Freight Lines, Inc., 563 F. Supp. 489, 493-95 (E.D. Ark. 1983).
A party that engages in affirmative activity in federal court typically
waives the right to seek a remand, see Financial Timing Pubs., Inc. v.
Compugraphic Corp., 893 F.2d 936, 940 (8th Cir. 1990),
3
This filing was unnecessary as a matter of state law because
removal "carries with it all pending proceedings" in the state
court garnishment action. Minn. Stat. Ann. § 571.87.
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particularly if the federal court has ruled unfavorably, see Nolan, 871
F.2d at 78-79.
In this case, Koehnen affirmatively sought leave to file a new
complaint in federal court. By the "mere filing of an amended petition,"
Koehnen "consented to accept the jurisdiction of the United States court."
In re Moore, 209 U.S. 490, 496 (1908), overruled in part on other grounds
by Ex parte Harding, 219 U.S. 363 (1911). He then filed a motion to
remand, but instead of seeking to withdraw or stay his prior motion until
the remand motion could be decided, Koehnen vigorously briefed and argued
his substantive motion. Only when Magistrate Judge Montgomery denied that
motion -- a ruling that was effectively a dispositive order -- did Koehnen
press the district court to remand. In these circumstances, if there was
discretion to rule that the right to seek remand had been waived, the
district court plainly did not abuse that discretion.
Koehnen argues that the 1988 amendment to 28 U.S.C. § 1447(c)4
implicitly abolished the discretionary waiver doctrine by imposing a
thirty-day time limit on motions to remand. There is no hint of such an
intent in the limited legislative history, which instead manifests a
concern that the former § 1447(c) had unwisely allowed litigants to seek
remand after receiving unfavorable rulings in federal court. See H.R. Rep.
No. 889, 100th Cong., 2d Sess. 72 (1988), reprinted in 1988 U.S.C.C.A.N.
5982, 6033. Like the Fifth Circuit, "we are persuaded that [amended]
section 1447(c) is a mere reconstitution of the existing statute and
jurisprudence." In re Medscope Marine Ltd., 972 F.2d 107, 109 (5th Cir.
1992). Therefore, the district court retained, and did not abuse, the
discretion to deny Koehnen's timely motion to remand on the ground
4
The Judicial Improvements and Access to Justice Act, P.L. No.
100-702, § 1016(c), 102 Stat. 4642, 4670 (1988).
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that his prior affirmative conduct in federal court had waived his right
to seek remand on non-jurisdictional grounds.5
III. The Merits.
Under Minnesota law, if a garnishee denies liability to the judgment
debtor, the judgment creditor-plaintiff may file a supplemental complaint
against the garnishee if the creditor shows "probable cause" that the
garnishee may be liable. Minn. Stat. Ann. § 571.75, subd. 4. In this
context, probable cause means a showing that the liability insurer may be
obligated to indemnify the judgment debtor for all or part of the Miller-
Shugart judgment. See Poor Richards, Inc. v. Chas. Olson & Sons & Wheel
Serv. Co., 380 N.W.2d 225, 227 (Minn. App. 1986).
The judgment creditor-plaintiff seeking to enforce a Miller-Shugart
settlement must prove more than insurance coverage. Because the settling
defendant's insurer declined to defend, it did not assume the liability
insurer's customary control over the settlement process. And the settling
insured, who will not be personally liable to pay the Miller-Shugart
settlement, "has no incentive to drive a hard bargain," that is, "no
compunction to agreeing that judgment may be entered against him for the
policy limits, even if the claim is worth less than the policy limits, if
it is worth anything." Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277,
280 (Minn. 1990). To guard against the obvious risk of unfairness, Koehnen
as judgment creditor-plaintiff must prove not only insurance coverage, but
also the absence of fraud or collusion and that the Miller-Shugart
settlement is reasonable. Miller, 316 N.W.2d at 734-35. The district
court found probable cause "with
5
We therefore need not decide which of Koehnen's state court
filings was the "initial pleading" for removal purposes -- his
garnishment summons to Herald Fire, or his state court motion to
file a supplemental complaint after Herald Fire had denied
garnishee liability.
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respect to the issue of coverage" but concluded that the settlement is
unreasonable because Rachel as a social host is not liable to Koehnen under
the Civil Damages Act. Without reaching those issues, we conclude that the
settlement is collusive.
In most cases, the only potential collusion is between the insured
and the plaintiff, and the collusion inquiry is therefore satisfied by
determining whether the settlement is reasonable. See Independent Sch.
Dist. No. 197 v. Accident & Cas. Ins., 525 N.W.2d 600, 607 (Minn. App.
1995). But this case is unusual. The Miller-Shugart doctrine was
fashioned to protect an insured who has been left to her own defenses
because the insurer refuses to defend against the plaintiff's liability
claim. The insured may escape this costly dilemma if the plaintiff is
willing to undertake the burden and risk of collecting the Miller-Shugart
settlement from the insurer. Here, on the other hand, Herald Fire did not
leave Rachel Paul to her own defenses, as she was being defended by her
father's insurer. Thus, the practical significance of Herald Fire's
refusal to defend was to signal its likely unwillingness to contribute to
a settlement on Rachel's behalf or to admit a duty to indemnify her for any
judgment in Koehnen's favor.
This set the stage for an atypical Miller-Shugart settlement.
Counsel representing Rachel, selected by Mr. Paul's insurer, agreed to
settle Koehnen's claim against Rachel for $325,000, to be collected only
from another insurer, Herald Fire. In substance, because even an
unreasonable Miller-Shugart settlement is binding on plaintiff and the
insured, the insurer that had agreed to defend Rachel thereby shifted the
entire risk that she might be liable to an insurer that denied it was even
obligated to defend. By the same token, Koehnen relinquished his right to
collect anything from the insurer that had admitted a duty to defend, in
exchange for a stipulated judgment collectible only from a non-
participating insurer with a far more remote connection to the events in
question. From Koehnen's perspective, this settlement is rational
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only if he has a better chance of proving coverage and reasonableness
against Herald Fire, than of proving liability and damages against an
insurer-defended Rachel Paul. Thus, Koehnen argues on appeal that we may
not consider Rachel's liability to Koehnen in determining whether the
Miller-Shugart settlement is reasonable, confirming that his objective in
settling was not to find a "deep pocket," but to escape the need to prove
liability.
In these circumstances, we conclude that the settlement is collusive
as a matter of law. It is not collusive in the ethical sense that any of
the attorney-negotiators did not fairly represent a client's interest. It
is collusive in the legal sense because it deprived Herald Fire of its
right to participate in the settlement process even though the insured,
Rachel Paul, was adequately defended and therefore did not require the
protections of the Miller-Shugart doctrine. Cf. Buysse v. Baumann-Furrie
& Co., 448 N.W.2d 865, 872-73 (Minn. 1989) (subsequent history omitted).6
IV. Conclusion.
In the typical Miller-Shugart case, if there is coverage but the
settlement is unreasonable, the underlying tort claim is reinstated for
trial. See Alton M. Johnson, 463 N.W.2d at 280. In this case, because the
settlement must be set aside as collusive and outside the purview of the
Miller-Shugart doctrine, we conclude that the litigating parties should
likewise be returned to the status quo ante. See Sturm v. School-Dist. No.
70, 47 N.W. 462 (Minn. 1890). Therefore, Koehnen's claim against Rachel
Paul is reinstated. Rachel will continue to be defended in the underlying
action by her father's insurer. The district court's rulings (i) that
there is probable cause to conclude that Rachel is covered
6
In addition, it appears that the settlement is unreasonable
as a matter of law because it did not allocate liability among the
defendants in the underlying tort action. See Bob Useldinger &
Sons, Inc. v. Hangsleben, 505 N.W.2d 323, 331 (Minn. 1993).
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under the Herald Fire policy, and (ii) that Rachel as a social host is not
liable for Koehnen's injuries under the Minnesota Civil Damages Act, are
vacated as moot. As there is no diversity jurisdiction over the underlying
tort action, all remaining issues must be decided by the Minnesota courts.
The judgment of the district court denying leave to file a
supplemental complaint and dismissing this garnishment action is affirmed.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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