Paul Russell, Jr. v. Liberty Insurance Underwriters, 950 F.3d 997

Background

Cates Sheet Metal shareholders adopted a Stock Agreement: company would purchase life insurance on each shareholder and use proceeds to buy a deceased shareholder’s stock from the personal representative.
Daniel Cates died in 2013; the company received the insurance proceeds but did not buy Daniel’s shares; Elizabeth Cates (widow/personal representative) was not paid and sued Russell and J. Carson for conversion and breach of fiduciary duty; judgment entered against Russell for $822,900.77.
Russell and J. Carson had an insurance policy from Liberty with Directors & Officers (D&O) and Fiduciary coverage; Liberty refused to defend/indemnify citing a Personal Profit Exclusion and a Contract Exclusion in the D&O coverage.
Plaintiffs sued Liberty for bad-faith failure to defend/indemnify; Liberty removed to federal court; plaintiffs sought remand arguing Missouri’s equitable garnishment statute (Mo. Rev. Stat. § 379.200) creates a “direct action” that makes the insurer share the insured’s citizenship.
The district court severed claims under Rule 21, denied remand, and granted Liberty summary judgment: held D&O Contract Exclusion barred coverage (liability arose from a contractual promise) and Fiduciary Coverage did not apply because the Stock Agreement was not an employee-benefit “Plan” under the policy.
The Eighth Circuit affirmed: § 379.200 is not a § 1332(c)(1) “direct action,” so diversity jurisdiction existed; the policy exclusions and definitions precluded coverage.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Missouri § 379.200 equitable garnishment is a § 1332(c)(1) “direct action” destroying diversity	§ 379.200 functions as a direct action; insurer should be deemed citizen of insured’s state, defeating diversity	§ 379.200 requires a prior judgment and joinder of the insured, so it is not the sort of direct-action Congress addressed	Not a direct action; diversity exists and remand denied
Whether D&O Coverage applies despite a contract-based exclusion	Elizabeth sued for conversion/fiduciary duty (non-contract theories); Marquis rule allows coverage when liability is distinct from excluded contract liability	Contract exclusion bars coverage for liabilities "based upon, arising out of, or attributable to" breach of contract; the liability arose from the Stock Agreement/promise	D&O Contract Exclusion applies; Marquis inapplicable here (disfavored/limited to negligent-entrustment/supervision contexts); no coverage under D&O
Whether Fiduciary Coverage applies (is the Stock Agreement a "Plan"?)	Stock Agreement created benefits for company participants and claims arose from fiduciary duties as plan fiduciaries, so Fiduciary Coverage applies	Stock Agreement primarily benefitted shareholders, not an employee-benefit "Plan" as defined; duties were to company/shareholders, not a Plan	Stock Agreement is not a Plan under policy; Fiduciary Coverage does not apply
Whether the district court abused discretion by severing claims under Rule 21 to preserve federal jurisdiction	Severance was improper and used to manufacture jurisdiction	Severance resolved the procedural impossibility (a party both plaintiff and defendant) and was a permissible management tool	Court did not decide Rule 21 abuse; because § 379.200 is not a direct action, federal jurisdiction existed and remand denial stands

Key Cases Cited

United States v. I.C.C., 337 U.S. 426 (1949) (a party generally cannot be both plaintiff and defendant in same case)
Gateway Residences at Exch., LLC v. Ill. Union Ins. Co., 917 F.3d 269 (4th Cir. 2019) (interpreting § 1332(c)(1) "direct action" narrowly to require suit against insurer without joinder or prior judgment against insured)
Gilbert v. Monsanto Co., 216 F.3d 695 (8th Cir. 2000) (standard of review for subject-matter jurisdiction issues)
Philadelphia Consol. Holding Corp. v. LSI-Lowery Sys., Inc., 775 F.3d 1072 (8th Cir. 2015) (standards for reviewing summary judgment and policy construction)
Marquis v. State Farm Fire & Cas. Co., 961 P.2d 1213 (Kan. 1998) (rule that distinct legal theory may recover despite an exclusion, applied narrowly)
Crist v. Hunan Palace, Inc., 89 P.3d 573 (Kan. 2004) (noting limitations and declining expansion of Marquis)
First Fin. Ins. Co. v. Bugg, 962 P.2d 515 (Kan. 1998) (policy interpretation principles; liability theory irrelevant when injuries arise from intentional acts)
Johnston v. Sweany, 68 S.W.3d 398 (Mo. 2002) (Missouri court characterizations of § 379.200 in state-law contexts)