Interlachen Props., LLC v. State Auto Ins. Co.
| Decision Date | 30 September 2015 |
| Docket Number | Civil No. 14–4380 (JRT/LIB) |
| Citation | 136 F.Supp.3d 1061 |
| Parties | Interlachen Properties, LLC; Kuepers Construction, Inc.; and Interlachen Propertyowners Association, Inc., Plaintiffs, v. State Auto Insurance Company, Defendant. |
| Court | U.S. District Court — District of Minnesota |
David D. Hammargren and Jason C. Tarasek, Hammargren & Meyer, P.A., 3500 American Boulevard West, Suite 450, Bloomington, MN 55431, for plaintiffs.
Cheryl A. Hood Langel and Robert L. McCollum, McCollum Crowley Moschet Miller & Laak, Ltd., 7900 Xerxes Avenue South, Suite 700, Minneapolis, MN 55431, for defendant.
JOHN R. TUNHEIM
Plaintiff Interlachen Properties, LLC ("the LLC") was the sales agent and real estate manager for a Crow Wing County housing development. Plaintiff Kuepers Construction ("Kuepers") constructed the development. After homeowners discovered design defects, Plaintiff Interlachen Propertyowners Association ("Interlachen"), which represents the homeowners in the development, filed a lawsuit alleging faulty construction. Interlachen eventually won a judgment of over $2 million against Kuepers, and it signed Miller–Schugart agreements with both the LLC and Kuepers, promising to seek the judgment only from Kuepers's insurer, Defendant State Auto Insurance Company ("State Auto").
The LLC, which felt it had also been insured by State Auto, filed a complaint in Crow Wing County in the fall of 2014, alleging that State Auto had breached its contractual obligations to defend the LLC. When the LLC filed its complaint against State Auto, the LLC also named Kuepers and Interlachen as defendants. All three of these entities—the LLC, Kuepers, and Interlachen—are Minnesotan companies (together, the "Minnesota Parties"). State Auto, on the other hand, is an Ohioan company. State Auto immediately removed the case to federal court. State Auto then moved to realign the parties, and argued that the Kuepers and Interlachen had been fraudulently joined as defendants. The LLC moved to remand the case back to state court.
United States Magistrate Judge Leo I. Brisbois subsequently granted State Auto's Motion for Realignment of the parties and ordered that the caption in this case be amended. Before this Court now are the LLC's objections to the Magistrate Judge's decision, along with the LLC's motion to remand. Because no actual or substantial conflict exists between the Minnesota Parties, the Court will overrule the LLC's objection to the Magistrate Judge's realignment decision. Consequently, because complete diversity exists, the Court will also deny the LLC's motion to remand.
In November 1997, Kuepers—a Minnesota construction company—began construction on a Common Interest Community in Crow Wing County, Minnesota ("the Project"). ( The LLC—also a Minnesota company—was Kuepers's real estate manager and, between 1997 and 2001, it was responsible for the marketing and sale of the residential units that made up the Project. (Id. ¶¶ 5, 10, 12.) Interlachen, a Minnesota non-profit, represented homeowners in the Project. (Id. ¶ 7.)
Kuepers initially completed work on many aspects of the Project in 2001. Nevertheless, Kuepers and the LLC continued to perform additional repair work on the Project through 2010. (Id. ¶ 13.) The LLC continued to operate as Kuepers's real estate manager for the Project until 2010, at which time Kuepers refused to perform further repairs on the Project and Kuepers and the LLC effectively severed ties with the Project. (Id. ¶ 12.)
It is helpful to briefly summarize the additional repairs Kuepers did on the project, between 2001 and 2010. In August 2001, Kuepers installed ridge vents on the roofs of the Project, and replaced rotted roof decking, wet insulation, and damaged shingles. (Id. ¶ 14.) Kuepers conducted a complete change in the roof system as well, labeling all of this work an "extension of the construction project development wide." (Id. ¶ 15.) Kuepers did not notify Interlachen, however, of the damage it found or the extent of the repairs. (Id. ¶ 14.)
In 2004, a series of repairs began involving the Project's siding. Interlachen found problems with the Project's siding in December 2004 and—during 2005—undertook efforts to repair this damage. (Id. ¶ 16.) Interlachen then declared that "all of the measurements [Kuepers] took were well within the acceptable level for wood." (Id. ) Once these repairs were complete, Kuepers and the LLC advised Interlachen that the siding problems had been resolved and that Kuepers "considered the matter closed." (Id. ¶ 17.) Nevertheless, in July 2006, Kuepers performed additional siding work, receiving payment from Interlachen for the work. (Id. ¶ 18.) Kuepers and the LLC then told Interlachen that this set of repairs had addressed Interlachen's concerns with the siding. (Id. ¶ 19.) Finally, Kuepers performed additional siding work on the Project in 2009. (Id. ¶ 20.) Interlachen initially paid Kuepers for this work, but then requested reimbursement under Kuepers's warranty agreements. (Id. ¶ 21.) The LLC was aware of and involved in the August 2001, December 2004, July 2006, and 2009 repairs. (Id. ¶¶ 14, 16, 18, 20.)
In 2010, Kuepers opted not to honor its warranty as to the 2009 repairs. (Id. ¶ 22.) The LLC also discontinued its role as Kuepers's real estate manager. (Id. ¶ 22.) In the fall of 2010, Interlachen retained an expert to do an exhaustive review of damage at the Project. (Id. ¶ 23.) This review revealed several problems: the siding, windows, weather resistive barriers, poly-vapor barrier, and insulation were all improperly installed; the grading was poorly done; and several of the Project's elements did not meet minimum building codes. (Id. ) Interlachen's experts also concluded that widespread design and engineering defects contributed to the damages. (Id. )
On November 28, 2011, Interlachen filed this action in Crow Wing County District Court, naming Kuepers and the LLC as defendants. (Id. ¶ 24.) In the lawsuit, Interlachen sought damages against the LLC for property damage caused by the LLC's negligence in the sale and marketing of the Project, and for the LLC's negligence in overseeing the construction and repairs. (Id. ) Interlachen also asserted claims against Kuepers for negligence, breach of contract, and breach of warranty. (Id. )
Kuepers and the LLC forwarded notice of the action to their insurer, State Auto, under policy No. PBP 2293305. (Id. ¶ 25.) State Auto is an Ohio corporation. (Id. ¶ 6.) State Auto did not defend the LLC. (Id. ¶ 27.) As a result, the LLC alleged that it was forced to incur significant expenses by retaining its own counsel to defend against Interlachen's claims. (Id. ¶ 28.)
In late 2012, the LLC won summary judgment against Interlachen. (Id. ¶ 29.) Interlachen filed a petition for discretionary review of the summary judgment ruling, but the petition was denied as premature since the case against Kuepers was ongoing. (Id. ¶ 30.) Interlachen also attempted an interlocutory appeal, at the same time as it tried to pierce the corporate veil in an attempt to impose personal liability upon both the LLC and its principals. (Id. ¶ 31.) Interlachen repeatedly expressed its intention to continue to pursue the LLC. (Id. )
On January 30, 2013, some of the parties—excluding the LLC—engaged in a mediation session. (Id. ¶ 32.) At the mediation, Interlachen submitted a joint demand to Kuepers and the LLC of $5,000,000 to resolve all claims. (Id. ¶ 33.) Interlachen's proposed settlement fell within the available policy limits of the State Auto policy. (Id. ) The counsel retained by State Auto to defend Kuepers countered with an offer on behalf of Kuepers in the amount of $10,000. (Id. ) Although the LLC, fearing continued pursuit by Interlachen, and possible reversal of its summary judgment victory, would have preferred to settle, State Auto did not make any offer of settlement on behalf of the LLC. (Id. ) The LLC alleges that State Auto did not request that it contribute to the settlement, never advised it that State Auto would deny coverage for most of the claims, and refused to settle despite Interlachen's suggested settlement amount being within State Auto's policy limits. (Id. ¶¶ 34–35.)
Because settlement negotiations between Kuepers and Interlachen failed, Interlachen's case against Kuepers continued. On February 21, 2014, following a jury trial, the state trial court entered judgment against Kuepers in the amount of $2,147,000. (Id. ¶ 38.) The court also required Kuepers to post a supersedeas bond in the amount of $2,147,000. (Id. ¶ 39.) After the entry of judgment, the parties again engaged in settlement discussions. (Id. ¶ 40.) Interlachen sought the judgment amount, but State Auto refused to settle and ultimately denied coverage to Kuepers. (Id. ¶¶ 40–41.) State Auto also refused to purchase or obtain an appeal bond on behalf of either the LLC or Kuepers. (Id. ¶ 42.)
As a result of State Auto's refusal to obtain the bond, Kuepers began to consider bankruptcy and, to avoid that fate, entered into a settlement with Interlachen. (Id. ¶ 44.) The settlement resulted in a Miller-Shugart agreement,1 dated July 24, 2014, which stipulated to a judgment of $2,940,875.15. (Aff. of Robert L. McCollum ("McCollum Aff."), Ex. 12, Oct. 28, 2014, Docket No. 7.) The agreement was limited to Interlachen's defective construction and negligent repair claims against Kuepers, and expressly reserved Interlachen's negligent design claims. The Miller-Shugart agreement included an agreement by Interlachen to pursue the judgment against State Auto, not Kuepers.2 (Id. at 5–7.) This agreement was recently the subject of similar litigation in this district, before Judge Ann Montgomery. Kuepers Constr., Inc. v. State Auto Ins. Co., No. 15–449 (ADM/LIB).
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