MEMORANDUM ORDER
I. Introduction
This matter came before the undersigned United States Magistrate Judge pursuant to a general assignment, made in accordance with the provisions of Title 28 U.S.C. § 636(b)(1)(A), upon the Motion of the Defendant Hartford Fire Insurance Company (“Hartford”) for Leave to Amend its Answer in order to add two additional affirmative defenses.
A Hearing on the Motion was conducted on January 6, 1997, at which time the Plaintiff Medical Graphics Corporation (“Med-Graphics”) appeared by Alan M. Anderson, Esq., and Hartford appeared by James T. Martin, Esq.
For reasons which follow, the Motion is granted in part and denied in part.
II. Factual and Procedural History
In December of 1995, MedGraphics entered into a Miller-Shugart-type
On August 2, 1996, our predecessor, Magistrate Judge John M. Mason, issued a Scheduling Order which directed that all Motions to Amend the pleadings should be served by September 1, 1996, and that discovery would close on November 15, 1996. By stipulation, Hartford filed its First Amended Answer on September 3, 1996. Thereafter, the parties agreed to extend the discovery deadline to December 15, 1996.
By this Motion, which was filed on December 13, 1996, Hartford seeks to amend its Answer so as to allege two affirmative defenses, each of which is based upon the terms of the insurance policy that it had issued to SensorMedics. The first of the proposed defenses seeks to assert that Hartford is not bound by the underlying settlement because the settlement was without Hartford’s consent. As for the second proposed defense, Hartford contends that SensorMedics failed to honor the provision, in the applicable policy, which required SensorMedics to cooper
III. Discussion
A. Standard of Review. Where, as here, the parties have exchanged their initial round of pleadings, Rule 15(a), Federal Rules of Civil Procedure, describes the appropriate procedure for amending a pleading as follows:
* * * [A] party may amend the party’s pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires. * * *
In construing this Rule, the Supreme Court has observed:
If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reason — such as 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, futility of amendment, etc. — the leave sought should, as the rules require, be “freely given.”
Foman v. Davis,
It is well-settled that leave to amend an Answer should be denied if the proposed defenses are legally insufficient. As one Court has properly observed, “[i]f the amended defenses are legally insufficient so as to invite a' motion to strike under Rule 12(f) * * * it would serve no purpose to allow the amendment over the plaintiffs objections.” Schaghticoke Tribe of Indians v. Kent School Corp.,
In considering the propriety of an amendment to a pleading, the policy of the Federal Courts, as exhorted by the Federal Rules, is to “accept the principle that the purpose of pleading is to facilitate a proper decision on the merits,” and to avoid an approach which would relegate the process to “a game of skill in which one misstep by counsel [might] be decisive to the outcome.” Foman v. Davis, supra, at 181-82,
In the final analysis, the granting of a Motion to amend the pleadings is vested in the sound discretion of the Trial Court. Ryan v. Sargent,
B. Legal Analysis. MedGraphics contends that the proposed affirmative defenses are not only futile, but also untimely, and that, to grant the Defendant’s Motion, would cause it to suffer substantial prejudice. We consider the proposed defenses seriatim.
1. The “No-action” Clause. By its proposed Amended Answer, Hartford seeks to incorporate a policy provision which preconditions a Judgment creditor’s suit on “a final judgment against an insured obtained after an actual trial” or “a settlement and release of liability signed by [Hartford], the insured, and the claimant (hereafter, the “no-aetion clause”).” See, Hartford’s Proposed Amended Answer. According to Hartford, an action to recover on the Judgment against Sen-sorMedies would not meet the requirements of the no-action clause because Hartford did not sign the settlement agreement, and the
In opposition, MedGraphies maintains that the policy should be interpreted under Minnesota law and, consistent with this interpretation, the proposed “no-action” defense is legally insufficient. To support its view of Minnesota law, MedGraphies relies on Miller v. Shugart,
As a consequence of the Court’s holding in Shugart, even in the presence of a no-action clause, “a settlement agreement in which an insured stipulates to a money judgment in favor of a plaintiff, and the plaintiff releases the insured from personal liability, is enforceable against the insurer if (1) the insurer receives notice of the agreement; (2) the agreement is reasonable; and, (3) the agreement is not the result of fraud or collusion.” Brownsdale Co-op. Ass’n v. Home Ins. Co.,
Rather than to distinguish Shugart, Hartford contends that the Plaintiffs claim is governed by California law, and that, “in a factual setting similar to the one that is present here,” California law would give effect to the no-action clause, and would preclude the enforcement of the Miller-Shugart settlement, in any direct action against Hartford. Hartford’s Memorandum in Support of Motion to Amend, at p. 4. As a threshold consideration, therefore, we must determine whether the laws of Minnesota, or those of California, should properly control the interpretation of the insurance policy at issue.
Of course, a Federal Court, which has jurisdiction over a case by virtue of the diversity of the parties’ citizenship, must apply the forum State’s conflict of law rules. Schoffman v. Central States Diversified, Inc.,
As we have already noted, under Minnesota law, it is clear that the no-action clause, as contained in Hartford’s policy, is unenforceable. In contrast, California’s law on this point is unsettled. To support its view of California law, Hartford cites Smith v. State Farm Mutual Automobile Ins. Co.,
Since Smith, however, the California Courts of Appeal appear to have moved their focus from the validity of the assignment to a consideration of whether the Judgment was fair and reasonable, and otherwise free from fraud and collusion. In Pruyn v. Agricultural Insurance Co.,
[W]hen * * * a liability insurer wrongfully denies coverage or refuses to provide a defense, then the insured is free to negotiate the best possible settlement consistent with his or her interests, including a stipulated judgment accompanied by a covenant not to execute. Such a settlement will raise an evidentiary presumption in favor of the insured (or the insured’s assignee) with respect to the existence and amount of the insured’s liability. The effect of such a presumption is to shift the burden of proof to the insurer to prove that the settlement was unreasonable or the product of fraud or collusion. If the insurer ,is unable to meet that burden of proof then the stipulated judgment will be binding on the insurer and the policy provision proscribing a direct action against an insurer except upon a judgment against the insured after an “actual trial” will not bar enforcement of the judgment.
Id. at 509,
According to the Pruyn Court, “[i]n no other way can the courts give any meaningful protection to an insured who is abandoned by a liability insurer * * * and at the same time provide to the insurer some measure of procedural due process in order to protect against the consequences of a fraudulent or collusive settlement.” id. at 530,
By all appearances, the procedure outlined in Pruyn, by which to enforce an agreed upon Judgment against an insurer, is similar to the mechanism set forth in Miller v. Shu-gart, supra. Under either Court’s reasoning, unless the insurer is able to establish fraud, collusion, or can demonstrate that the settlement was unreasonable, an insurer cannot avoid liability simply by relying upon a “no action” clause. In view of the fact that Pruyn was only recently decided, and that the California Supreme Court has not addressed the apparent conflict between Pruyn
Having presumed that a conflict exists, we next consider “whether the law of both states can be constitutionally applied.” Jepson v. General Cas. Co. of Wisconsin, supra at 469. “[F]or a State’s substantive law to be selected in a constitutionally permissible manner, that State must have a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair.” Allstate Insurance Co. v. Hague,
Under such circumstances, where the law of either State may be constitutionally applied, the Minnesota Courts have adopted Professor Leflar’s “choice-influencing” methodology. See, Klimstra v. Granstrom,
Hartford asserts that the first factor — the predictability of the result — weighs heavily in favor of the application of California law. The objective of this factor “is to fulfill the parties’ justified expectations.” Jepson v. General Cas. Co. of Wisconsin, supra at 470. .Hartford argues that it reasonably expected its obligations to be governed by California law, since the policy was issued in that State. However, in U.S. Fire Ins. Co. v. Goodyear Tire & Rubber Co.,
There, the .insurers of a manufacturer, which had been found liable to a Minnesota resident for an accident that occurred in Minnesota, sought a declaratory judgment on whether its policies provided coverage for a
Likewise, in Bd. of Regents of U. of M. v. Royal Ins.,
We are persuaded by the reasoning in the Goodyear Tire, Bd. of Regents, and Mankato Iron decisions, and conclude that the predictability of results factor should be given little consideration. Given that SensorMedics did not restrict its operations to California, Hartford was on notice that its insured was at risk of suit in other states, and that the law of those states may be applied to interpret its policy.
In so concluding, we are not persuaded that Jepson v. General Cas. Co. of Wisconsin — which is cited by Hartford — holds that predictability will always favor the party seeking to apply the law of the contracting State. Upon a careful reading, Jepson is distinguishable from the circumstances of this case. There, the Court interpreted an automobile policy in accordance with North Dakota law, which was the State in which the contract was issued, notwithstanding the fact that the policy was sold through a Minnesota agency, and the plaintiffs were Minnesota residents. Given that the policy was calculated using North Dakota rates, which were substantially less expensive than the rates that pertained in Minnesota, and covered named insureds who resided at a North Dakota address and whose vehicles were registered and titled in North Dakota, the Court determined that the parties had bargained for a North Dakota insurance contract, and thus were entitled to the benefit of their bargain. Id. at 470-71. Indeed, testimony indicated that, had the policy been written at higher rates, the insurance agent may have lost the sale. Id. at 468. In contrast, Hartford has not set forth any evidence which suggests that it bargained with SensorMed-ics for an insurance policy with the mutual expectation that the interpretation of that policy would be governed by California law. In the absence of such evidence, the mere fact that the policy was issued in California is not determinative of the parties’ expecta
The second factor — maintenance of interstate order — concerns “whether the application of Minnesota law would manifest disrespect for [the other State’s] sovereignty or impede the interstate movement of people and goods.” Id. at 471. Evidence of forum-shopping, or that application of Minnesota’s law would promote forum-shopping, would indicate such disrespect. Id. This consideration requires that the State, whose laws are ultimately applied, “have sufficient connection with the facts at issue.” Klimstra v. State Farm Auto Ins. Co.,
Here, Minnesota has stronger contacts with this action than California. Specifically, the agreement that is sought to be enforced, which terminated an action that was filed and litigated in Minnesota, and which concerned underlying tortious conduct that had, in large part, occurred in Minnesota, was negotiated in Minnesota as a consequence of Court-supervised mediation. Given the extensive contacts Minnesota has with the present litigation, maintenance of interstate order favors the application of Minnesota law. Here, there is no evidence that MedGraphics has engaged in forum shopping, or has participated in any other conduct which would reflect disrespect for the sovereignty of California. Cf., Jepson v. General Cas. Co. of Wisconsin, supra at 471 (in bringing suit in Minnesota, to secure greater benefits than would have been available under North Dakota law, the Court found evidence that the plaintiff was forum-shopping, for he had previously commenced litigation in North Dakota, arising from the same accident, to secure a benefit payable under North Dakota law).
The third factor, which relates to the simplification of the judicial task, is most often considered insignificant because Courts can just as easily apply another State’s laws as' their own. See, American States Ins. v. Mankato Iron & Metal, supra at 1444. As noted above, however, California law, as to the enforceability of no-aetion clauses, is unclear. In contrast, “the Minnesota decisions speak with one voice in their interpretation of Miller-Shugart agreements, agreeing that a settlement made before an insurer acknowledges coverage is not a violation of the duty to cooperate.” McNicholes v. Subotnik,
The final choice influencing factor concerns which forum has the better rule of law. The better rule of law; is the rule that makes “good socio-economic sense for the time when the court speaks.” Jepson v. General Cas. Co. of Wisconsin, supra at 473, quoting Robert A. Leflar, Conflicts Law: More on Choice-Influencing Considerations, 54 Calif.L.Rev. 1584, 1588 (1966). This factor, however, applies only when the first four factors do not clearly resolve the choice of law question. Nesladek v. Ford Motor Co.,
In sum, we conclude that Minnesota law should apply to the interpretation of the no-action clause and, since the no-action clause is unenforceable under Minnesota law, Hartford’s Motion for leave to Amend, so as to incorporate an affirmative defense that is premised upon such a clause, is denied.
2. Failure to Cooperate. Next, Med-Graphics argues that Hartford’s second proposed defense — SensorMedics’ asserted failure to cooperate with Hartford — is futile and, therefore, unavailing. Specifically, Med-Graphics argues that, as opposed to not cooperating, SensorMedics provided assistance to Hartford by making available, for Hartford’s review, “all of the tens of thousands of documents and many depositions taken during the underlying litigation.” MedGraphics’ Memorandum in Opposition to Hartford’s Motion to Amend, at p. 4.
Where, as here, a party opposes an amendment on the ground of futility, leave to amend an Answer in order to assert an affirmative defense should be denied “only if no set of facts can be proved under the amendment to the pleadings that would constitute a valid and sufficient” defense. Miller v. Rykoff-Sexton, Inc.,
Next, MedGraphics complains that the Motion is untimely, and that MedGraphics would be severely prejudiced if the Motion were granted. As to timeliness, we are mindful that all Motions to Amend pleadings were to be served by September 1,1996, and that, therefore, the present Motion should be considered within the framework of Rule 16(b), Federal Rules of Civil Procedure. Alholm v. American S.S. Co.,
In support of this Motion, Hartford has submitted the Affidavit of its counsel, which avers that prior defense counsel effectively erred in failing to assert the proposed defense. Affidavit of James T. Martin. Counsel for Hartford further avers that, at the time that he was retained, in late October of 1996, he was required “not only to respond to substantial outstanding discovery requests from plaintiff but, in addition, he was also required to generate written discovery requests as none had been served prior to your affiant’s becoming involved in the case.” Id. In turn, for prejudice, MedGraphics asserts that, because the period in which to conduct discovery has closed, MedGraphics would be denied the opportunity to explore the factual and legal bases for any claim that Sen-sorMedics failed to cooperate with Hartford in the underlying litigation. Given these respective positions, and under the totality of the circumstances before us, we are persuaded that an onerous burden will not befall MedGraphics if Hartford is permitted to assert this limited defense. In our view, the failure to cooperate claim is implicitly subsumed in the Miller-Shugart procedure, and therefore, the character of the litigation is unlikely to change by permitting the requested amendment. As we have noted, a Miller-Shugart settlement is not enforceable against an insurer if the insurer is not provided notice of the agreement, or if other critical factors are demonstrated.
In balancing the factors at play, we conclude that, absent prejudice that cannot be rectified by a slight extension of the discovery deadline, Hartford should not be penalized for the asserted errors of its prior legal counsel. Cf., Granus v. North American Philips Lighting Corp.,
Accordingly, Hartford’s Motion to Amend its Answer, in order to assert a claim that SensorMedics failed to cooperate with Hartford in the underlying litigation, is granted, in addition, we will amend our Scheduling Order of October 17, 1996, so as to permit the parties to conduct discovery on the issue of SensorMedics’ cooperation with Hartford. Nevertheless, we find no reason — at least at this stage — to extend the dispositive motion and “Ready for Trial” dates, which are set to expire on April 1, 1997, and August 1, 1997, respectively.
NOW, THEREFORE, It is—
ORDERED:
1. That Hartford’s Motion to Amend its Answer, in order to add an affirmative “no action clause” defense [Docket No. 17], is DENIED, while Hartford’s Motion to Amend its Answer, in order to assert a “failure to cooperate” defense [Docket No. 17], is GRANTED.
2. That Hartford is directed, forthwith, to serve and file a Second Amended Answer as allowed by this Order.
3. That the period during which the parties may conduct discovery on the issue of whether SensorMedics failed to cooperate with Hartford in the underlying litigation shall terminate on March 15,1997.
Notes
. In a Miller-Shugart settlement, a plaintiff settles with a tortfeasor but agrees that the Judgment will only be collected from the proceeds of any applicable insurance policy. In Miller v. Shugart,
. Up to this point, Hartford does not appear to challenge this analytical result, as it has failed to draw any authority to our attention which overrules, or substantially undermines, the Minnesota Supreme Court's holding in Shugart.
. Our decision to continue with the conflicts analysis is further supported by our conclusion that, regardless of a conflict, this action should proceed under the procedure prescribed in Shu-gart for, in the absence of any conflict, we apply the law of the forum State. Davis v. Outboard Marine Corp.,
. According to Hartford, this case should be governed by California law since the policy was issued in California to a California insured. However, because the Minnesota Supreme Court "has abandoned the lex loci doctrine in favor of the ‘choice influencing considerations’ methodology,” Milbank Mut. Ins. Co. v. U.S. Fidelity,
. Although the parties have not furnished the Court with a copy of the policy, we are not aware of any provision that mandates the application of California law as governing the interpretation of that policy in suits filed in other states, so as to suggest that the contracting parties had intended to be bound by California law. See, U.S. Fire Ins. Co. v. Goodyear Tire & Rubber Co.,
. Moreover, in view of the fact that, in Jepson, the plaintiff was injured in Arizona, the Court found it unlikely that the parties could have foreseen the application of Minnesota law. Jep-son v. General Cas. Co. of Wisconsin,
. The second decision, that has been relied upon by Hartford to support its choice of law analysis — Heritage Mutual Ins. Co. v. Croix Circuits, No. CX-95-1354,
. Because we conclude that the no-action defense is futile, we need not, and do not consider MedGraphics’ alternative argument, that Hartford’s Motion to Amend should be denied as untimely.