Paul T. Russell, Jr.; J. Carson Cates, Plaintiffs - Appellants v. Liberty Insurance Underwriters, Inc., Defendant - Appellee
No. 18-2984
United States Court of Appeals For the Eighth Circuit
February 19, 2020
Before SHEPHERD, GRASZ, and KOBES, Circuit Judges.
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.
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
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.
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
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.
To determine whether the Trust‘s equitable garnishment claim against Liberty was a “direct action,” the district court examined the claim‘s statutory basis:
The district court never resolved the direct-action question because
The district court came up with a solution. Citing its authority under
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.
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.”
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.”
Jurisdiction therefore hangs on whether the Trust‘s equitable garnishment claim — brought under
We agree with the Fourth Circuit‘s recent holding that “direct action,” as used in
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
Because
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).
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
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 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.