Monticello Banking Co. v. Everest Nat'l Ins. Co.

• Decision Date: 26 September 2013
• Docket Number: Civil No. 13-17-GFVT
• Parties: MONTICELLO BANKING COMPANY, Plaintiff, v. EVEREST NATIONAL INSURANCE COMPANY, and GARRY HAMMER, Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

MONTICELLO BANKING COMPANY, Plaintiff, v. EVEREST NATIONAL INSURANCE COMPANY,and GARRY HAMMER, Defendants.

Civil No. 13-17-GFVT

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF KENTUCKY SOUTHERN DIVISION LONDON

Dated: September 26, 2013

MEMORANDUM OPINION&ORDER

Bank customers expect their investment to be protected by the Federal Deposit Insurance Corporation ("FDIC"). One mechanism which the FDIC requires banks to employ is an insurance policy to cover the costs of litigation. A Directors and Operators Policy ("D&O Policy") pays all litigation costs for employees and all litigation costs beyond a retainer fee for the bank. When a disgruntled customer sued Monticello Banking Company ("Monticello") and its employee Garry Hammer (both Kentucky citizens), the D&O Policy held through New Jersey-based Everest National Insurance Company ("Everest") kicked into place. Disagreement over performance of that policy gave rise to the case at hand. Monticello initiated litigation against Everest and Hammer that has been removed to federal court, despite the presence of a Kentucky plaintiff and co-defendant.

I

A

This matter is before the Court on Co-Defendant Hammer's Motion to Dismiss [R. 6] under Federal Rule of Civil Procedure ("FRCP") 12(b)(6). Connected to the motion to dismiss are Plaintiff Monticello's Motion to Remand [R. 13] and Defendant Everest's Motion to Dismiss the claims against Hammer under FRCP 12(c). [R. 22-23.] Because the arguments in these motions are so intertwined with each other, the Court will consider and decide them together.

Defendant Everest claimed that removal was proper on the following three bases: federal question jurisdiction, diversity jurisdiction based on fraudulent joinder, and diversity jurisdiction based on fraudulent misjoinder. [R. 1 at 4, 8, 10; R. 23 at 3.] The claim of federal question jurisdiction in this case is not well-founded. Everest's invocation of diversity jurisdiction is well-founded, however, because Monticello has not stated a valid claim against Co-defendant Hammer, and thus Hammer is not a real party in interest, and his citizenship is not considered for purposes of diversity. Consequently, the Plaintiff's motion to remand will be DENIED, and Co-Defendant Hammer's motion to dismiss will be GRANTED. This result will then render moot Defendant Everest's motion to dismiss under FRCP 12(c).

B

This case is an insurance coverage action originally filed in Wayne County Circuit Court in Wayne County, Kentucky, on December 20, 2012. [R. 1 at 2.] Plaintiff Monticello is a Kentucky corporation with its principal place of business in Kentucky. [R. 1 at 1.] Defendant Everest is a Delaware corporation with its principal place of business in New Jersey. [Id.] Co-defendant Hammer is an individual resident and citizen of Kentucky. [Id.] Monticello had purchased two separate insurance policies from Everest that are at issue in the dispute between them. One, a D&O Policy, provides general coverage for litigation expenses incurred by Monticello when defending its directors and officers. [R. 1 at 2.] The other, a FinancialInstitution Bond (the "Fidelity Bond"), provides general coverage for Monticello's direct losses caused by dishonest employees. [Id.] On December 19, 2011, a customer of Monticello's named Michael Barrick sued both Monticello and Monticello's employee and officer Garry Hammer for inducing Barrick to purchase a business on false information and to participate in improper loans. [R. 1 at 2-3; R. 13 at 4.] Because of Monticello's insurance policies, Everest identified defense counsel Matthew Breetz from Stites & Harbison to defend Hammer in the lawsuit. [R. 1 at 3.] When notified of the suit, Monticello rejected Everest's choice of defense counsel and instead retained its longtime counsel Frost Brown Todd, LLC to defend Monticello's interests in the case. [R. 13 at 4-5.]

Monticello insisted that Frost Brown Todd act as counsel and demanded that Everest pay costs involved in retaining duplicate counsel. [Id.] Everest refused to pay the costs and alleged that Monticello breached the D&O Policy by selecting its own counsel. [Id.] Monticello then sued Everest, alleging that Everest breached its obligations under both insurance policies when it failed to reimburse Monticello for legal expenses directly related to Hammer's dishonest conduct, and that Monticello is entitled to indemnification under the insurance policies. [R. 1 at 3; R. 13 at 5.] Everest responded by filing counterclaims against Monticello for not reimbursing Everest for the legal fees incurred by Everest's chosen counsel. [R. 1 at 3; R. 13 at 5-6.] Among other things, Monticello also sought declaratory judgments that under the D&O Policy and Kentucky law it had no duty to pay Breetz's fees, that it may not indemnify Hammer for any expenses, and that Everest had a duty to reimburse Monticello for Frost Brown Todd's fees. [R. 1 at 4.] Hammer was included as a co-defendant in this action because costs at issue were incurred in his defense. [Id.]

Everest filed a timely notice of removal to federal court on January 23, 2012, premised in part on 28 U.S.C. § 1331 federal question jurisdiction. [R. 1 at 1, 10.] Everest alleges that this controversy arises from a bond required by the FDIC Risk Management Manual of Examination Policies § 4.4, which creates a "law of the United States," 28 U.S.C. § 1352, and therefore confers federal question jurisdiction on this cause of action. [R. 1 at 10-11.] Everest's removal is also premised on 28 U.S.C. § 1332 diversity jurisdiction. [R. 1 at 7.] Monticello identifies its loss as exceeding $2 million, clearly surpassing the $75,000 threshold. [R. 1-2 at 8.] Section 1332's requirement of complete diversity on both sides of the action is the primary point of contention in this case. See 28 U.S.C. § 1332(a)(1). Everest has alleged that Monticello has joined Hammer solely to defeat diversity because there is no colorable basis on which Monticello could recover against Hammer. [R. 1 at 4-5.] If Hammer has been fraudulently joined, his citizenship should not be considered for diversity jurisdiction analysis, thus perfecting complete diversity.

Monticello has responded by filing a motion to remand this action for lack of federal question jurisdiction, claiming that it was not required by federal law to purchase the Fidelity Bond. [R. 13 at 14-15.] Monticello argues that although the FDIC has the power to enact a manual, the manual does not carry the same force as a regulation, and thus the controversy does not concern a "bond executed under any law of the United States" for purposes of federal question jurisdiction. [Id.] Monticello also requests the action be remanded for lack of complete diversity. [R. 13 at 2.] A removed action must be remanded if there is any colorable basis upon which a plaintiff may recover against a non-diverse defendant. Coyne v. Am. Tobacco Co., 183 F.3d 488, 493 (6th Cir. 1999). Monticello argues that if Monticello advances payment of costs for Hammer's defense, and it is later determined that Hammer does not meet KRS 271B.8-510,Monticello will seek recovery of the costs. [R. 26 at 7]. According to Monticello, this scenario creates a colorable basis upon which it can recover from Hammer, which would make him a real party in interest and destroy complete diversity. Id.

Hammer's motion to dismiss contests Monticello's claim that he is a real party in interest. According to Hammer, Monticello has not stated a claim against him for which relief can be granted, and the action against him should be dismissed under FRCP 12(b)(6). [R. 6 at 3-5.] In its FRCP 12(c) motion, Defendant Everest agrees that Monticello has failed to make a colorable claim against Hammer, and argues that Hammer should be dismissed from the case based on fraudulent joinder. Because the 12(b)(6) motion was filed first, the Court will address that motion first, although the arguments in all three motions are integrally connected.

C

A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the Plaintiff's complaint. In reviewing a Rule 12(b)(6) motion, the Court "construe[s] the complaint in the light most favorable to the plaintiff, accept[s] its allegations as true, and draw[s] all inferences in favor of the plaintiff." DirecTV, Inc. v. Treesh, 487 F.3d 471, 476 (6^th Cir. 2007) (citation omitted). The Court, however, "need not accept as true legal conclusions or unwarranted factual inferences." Id. (quoting Gregory v. Shelby County, 220 F.3d 433, 446 (6^th Cir. 2000)). Recently, the Supreme Court explained that in order "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Courier v. Alcoa Wheel & Forged Products, 577 F.3d 625, 629 (6^th Cir. 2009). Stated otherwise, it is not enough for a claim to be merely possible; it must also be "plausible." Courier, 577 F.3d at 630. According to the court,facial plausibility requires the plaintiff to plead "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. Although the plausibility requirement is not the same as probability, it does require "more than a sheer possibility that a defendant has acted unlawfully." Id.; Twombly, 550 U.S. at 570.

Here, Monticello seeks a declaratory judgment that it has no duty to pay Hammer's legal fees or indemnify him for his legal expenses already incurred. Hammer, however, has not requested such indemnification, and argues that Monticello's claims against him should be dismissed because no "justiciable controversy" exists between him and Monticello. [R. 6 at 3.] Article III of the Constitution requires that claims in federal litigation involve justiciable controversies. Friends of...