Moses v. Halstead

• Decision Date: 08 September 2009
• Docket Number: No. 08-3088.,No. 08-3199.,08-3088.,08-3199.
• Citation: 581 F.3d 1248
• Parties: Shelby MOSES, Plaintiff-Appellant, v. Chris HALSTEAD, Defendant, and Allstate Insurance Company, Garnishee-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

581 F.3d 1248

Shelby MOSES, Plaintiff-Appellant, v. Chris HALSTEAD, Defendant, and Allstate Insurance Company, Garnishee-Appellee.

No. 08-3088.

No. 08-3199.

United States Court of Appeals, Tenth Circuit.

September 8, 2009.

William J. Pauzauskie of Topeka, KS, for Plaintiff-Appellant.

Barrett J. Vahle (Curtis E. Woods with him on the brief), of Sonnenschein Nath & Rosenthal LLP, Kansas City, KS, for Garnshiee-Appellee.

Before MURPHY, SEYMOUR, and TYMKOVICH, Circuit Judges.

SEYMOUR, Circuit Judge.

Shelby Moses brings this appeal, asserting that the district court erred in its choice-of-law and state-law determinations. Ms. Moses requested a garnishment order, in Kansas, against Allstate Insurance Company ("Allstate") for its alleged negligent or bad faith refusal to settle Ms. Moses' claim against Chris Halstead, Allstate's insured. The district court found for Allstate, concluding that Missouri law applies and requires an actual assignment to Ms. Moses by the insured of its claim against Allstate for its failure to settle, an assignment Ms. Moses does not have. Because we conclude that Kansas law applies to this dispute, we reverse and remand.

I.

In Missouri, on November 22, 1996, Chris Halstead wrecked a car given to Ms. Moses by her father and insured by Allstate. Allstate had issued the insurance policy in Kansas to Ms. Moses' father, a Kansas resident, covering liability for uninsured motorist benefits. Ms. Moses, a passenger in the car, was injured in the accident. Shortly thereafter her father reported the accident to Allstate, requesting coverage for his daughter's injuries. Allstate began an investigation.

A year later, Ms. Moses' counsel made an offer to Allstate to settle her claims against Mr. Halstead under the Allstate policy for the policy limit of $25,000. Allstate rejected Ms. Moses' offer. Both Ms. Moses' offer to settle and Allstate's rejection of it occurred in Kansas.

Ms. Moses then filed a tort action against Mr. Halstead in Missouri, the place of the accident. The jury awarded her $100,000 in actual damages. After the judgment was entered, Allstate paid Ms. Moses $25,000 in partial satisfaction of the judgment. Ms. Moses registered the judgment in Kansas state court and requested an Order of Garnishment against Allstate for its alleged negligent or bad faith refusal to settle with her on her claim against Mr. Halstead. Allstate removed the case to federal court.

Thereafter, Allstate filed a motion for summary judgement. The parties based their summary judgment arguments on Kansas law and the district court, without addressing any governing law issue, applied Kansas law in ruling on the motion. The court denied the motion, determining there were material issues of fact that if backed by evidence would prove Allstate's negligent or bad faith refusal to settle Ms. Moses' claims against Mr. Halstead.

At trial, Allstate changed course and contended that Missouri law should be applied. The district court took the issue under advisement, noting in the pretrial order that Allstate had asserted the applicability of Missouri law. After a bench trial, the court denied Allstate's motion for a judgment as a matter of law and held that Missouri law governs Ms. Moses' claim. The district court then found that, under Missouri law, Allstate had acted in bad faith in refusing to settle and entered judgment for Ms. Moses. Allstate filed a motion for reconsideration arguing that, among other things, Missouri law requires an assignment from the insured, in this case Mr. Halstead, before a judgment creditor can file an action against the insurance company for its bad faith refusal to settle. Mr. Halstead did not assign his claim against Allstate for bad faith refusal to settle to Ms. Moses. The district court granted Allstate's motion for judgment, rejecting Ms. Moses' argument that the court should have applied Kansas law, which does not require an assignment in these circumstances.

II.

We review the district court's choice-of-law and state-law determinations de novo. Trierweiler v. Croxton & Trench Holding Corp., 90 F.3d 1523, 1535 (10th Cir.1996) ("We review choice of law determinations de novo, and findings of fact underlying those determinations for clear error."); Woolard v. JLG Indus., Inc., 210 F.3d 1158, 1168 (10th Cir.2000) ("A federal district court's state-law determinations are entitled to no deference and are reviewed de novo."). On appeal, the parties focus on two main issues: (1) whether Missouri or Kansas law governs the negligent or bad faith refusal to settle claim; and (2) whether under the applicable law Ms. Moses can garnish Allstate for $75,000, an amount in excess of the policy limit, for negligent or bad faith refusal to settle.

A. The Governing Law

In Kansas, an insurance company can be held liable not only for acting in bad faith but also for acting negligently. See Spencer v. Aetna Life & Cas. Ins. Co., 227 Kan. 914, 611 P.2d 149, 155 (1980). In Missouri, however, to hold an insurance company liable for bad faith refusal to settle the plaintiff must provide proof that the insurer acted in bad faith. See Ganaway v. Shelter Mut. Ins. Co., 795 S.W.2d 554, 556 (Mo.Ct.App.1990). The district court, in this diversity case, was initially correct in applying Kansas law to determine whether Kansas or Missouri law should govern Ms. Moses' negligent or bad faith refusal to settle claim. See Mem'l Hosp. of Laramie County v. Healthcare Realty Trust, Inc., 509 F.3d 1225, 1229 (10th Cir.2007).

In Kansas, an insurer's duties are contractually based.¹ See Glenn v. Fleming, 247 Kan. 296, 799 P.2d 79, 90 (1990) (stating that "a wrongful failure to settle arises from the insurer's contractual obligation to defend" and "[a]n action to enforce that obligation is accordingly based on breach of contract."). Breach of this contractual duty, however, is determined by a tort standard of care. See id. Since 1957, Kansas courts "have used `negligence,' `due care,' and other tort expressions to describe the substance of what is a contract duty." Id. This contract-tort fusion has created confusion in defining the duty of good faith, and in describing situations involving negligent or bad faith breaches of duties to settle and defend. See id.

This case involves two issues regarding the district court's choice-of-law determination arising out of the insurance contract. First, whether the district court erred in applying Missouri law to determine whether Allstate had a contractual obligation to act in good faith to settle. Second, whether the district court was wrong in applying Missouri law to the question of Allstate's fulfillment of such obligation.

1. Law Governing the Existence of Allstate's Contractual Obligation to Act in Good Faith to Settle

Kansas courts follow the Restatement (First) of Conflict of Laws (1934) in addressing choice-of-law issues. See ARY Jewelers, L.L.C. v. Krigel, 277 Kan. 464, 85 P.3d 1151, 1161 (2004). The Restatement contains two general rules for contracts cases. See Restatement (First) of Conflict of Laws §§ 332 and 358 (1934).

When the question raised by the contractual dispute goes to the substance of the obligation, Kansas courts apply the primary rule contained in section 332, lex loci contractus, which calls for the application of the law of the state where the contract is made. See Layne Christensen Co. v. Zurich Canada, 30 Kan.App.2d 128, 38 P.3d 757, 766-67 (2002); Restatement (First) of Conflicts of Law § 358, Cmnt. b (1934); cf. In re K.M.H., 285 Kan. 53, 169 P.3d 1025, 1031-32 (2007) ("[T]o the extent this case is viewed as a contractual dispute, Kansas courts apply the Restatement (First) of Conflict of Laws § 332 (1934), and the doctrine of lex loci contractus, i.e., the law of the state where the contract is made governs."). It is only when the question goes to the manner and method of performance that the law of the place of performance applies. See Layne Christensen Co., 38 P.3d at 766-67; Restatement (First) of Conflicts of Law, § 358, Cmnt. b (1934).

Kansas courts have struggled in determining whether questions raised in cases before them are governed by the law of the place of performance or the place where the contract was made. See Layne Christensen Co., 38 P.3d at 766-67 (comparing Novak v. Mutual of Omaha Ins. Co., 29 Kan.App.2d 526, 28 P.3d 1033 (2001), applying lex loci contractus when determining validity of contract provision, and Aselco, Inc. v. Hartford Ins. Group, 28 Kan.App.2d 839, 21 P.3d 1011 (2001), applying performance rule on duty to defend issue and lex loci contractus to contract interpretation issue). The Restatement recognizes the difficulty in drawing a line between these concepts:

[T]here is no logical line which separates questions of the obligation of the contract, which is determined by the law of the place of contracting, from questions of performance, determined by the law of the place of performance. There is, however, a practical line which is drawn in every case by the particular circumstances thereof. When the application of the law of the place of contracting would extend to the determination of the minute details of the manner, method, time and sufficiency of performance so that it would be an unreasonable regulation of acts in the place of performance, the law of the place of contracting will cease to control and the law of the place of performance will be applied. On the other hand, when the application of the law of the place of performance would extend to a regulation of the substance of the obligation to which the parties purported to bind themselves so that it would unreasonably determine the effect of an agreement made in the place of contracting, the law of the place of performance will give way to the law of the place of contracting.

Restatement (First) of Conflicts of Law § 358, Cmnt. b (1934) (emphasis added).

Allstate relied on Aselco in arguing that the law of the place of performance of...