Nationwide Mut. Fire Ins. Co. v. Hatton

• Decision Date: 11 January 2019
• Docket Number: Case No. 5:18-cv-460-JMH
• Citation: 357 F.Supp.3d 598
• Parties: NATIONWIDE MUTUAL FIRE INSURANCE COMPANY, Plaintiff, v. Kenneth HATTON and Lora Hatton, Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

357 F.Supp.3d 598

NATIONWIDE MUTUAL FIRE INSURANCE COMPANY, Plaintiff,

v.Kenneth HATTON and Lora Hatton, Defendants.

Case No. 5:18-cv-460-JMH

United States District Court, E.D. Kentucky, Central Division at Lexington.

Signed January 11, 2019

Gary W. Thompson, John W. Walters, Walters Meadows Richardson, PLLC, Lexington, KY, for Plaintiff.

Thomas Walcutt Miller, Elizabeth Catesby Woodford, Miller, Griffin & Marks, P.S.C., Lexington, KY, for Defendants.

MEMORANDUM OPINION AND ORDER

Joseph M. Hood, Senior U.S. District Judge

Defendants Kenneth and Lora Hatton move to amend or correct their Answer and Counterclaim against Plaintiff Nationwide Mutual Fire Insurance Company. [DE 14]. The Hattons seek to add The Roark Agency, LLC, ("Roark" or "Agency") to the action as a third-party plaintiff, claiming that Roark is an indispensable party. [See DE 14 at 1, Pg ID 105]. Contemporaneously, the Hattons move to dismiss the matter for lack of subject matter jurisdiction because adding Roark as a third-party plaintiff will destroy complete diversity of citizenship between the parties. [DE 15]. Alternatively, notwithstanding the Court's decision on adding Roark as a party, the Hattons argue that the Court should decline to exercise jurisdiction over this matter because they claim Nationwide's lawsuit constitutes procedural fencing to gain jurisdiction in federal court and that the relevant considerations counsel against the exercise of federal jurisdiction in this matter. [DE 15 at 4-7, Pg ID 115-18]. Thus, that Hattons assert that this federal case should be dismissed and heard in state court. [Id. ].

In response, Nationwide asserts that the Hattons' Motions are nothing more than attempts to destroy federal diversity jurisdiction. [DE 18 at 2, Pg ID 126]. In support of this contention, Nationwide argues that Roark is not an indispensable party, that if Roark is joined, it should be joined as a third-party defendant, and that this Court should exercise jurisdiction in this matter under the Declaratory Judgment Act. [DE 18]. The Hattons tendered a consolidated reply, making this matter ripe for review. [DE 19].

Here, the Hattons have failed to establish that the Roark Agency is an indispensable party, so the Hattons' Motion to Correct or Amend the Answer to Complaint and Counterclaim [DE 14] is DENIED . But because the relevant factors and considerations weigh against exercising federal jurisdiction in this matter and because the state court is a more practical and efficient forum for resolution of this action, the Hattons' Motion to Dismiss [DE 15] is GRANTED IN PART and DENIED IN PART and this action is DISMISSED WITHOUT PREJUDICE .

I. Procedural and Factual Background

On or around October 30, 2017, the Defendants, Kenneth and Lora Hatton, applied for a dwelling insurance policy to insure real property they owned at 121 East High Street in Mount Sterling, Kentucky. [DE 1-2]. On December 8, 2017, the insured property was damaged by a fire. As a result, the Hattons made a claim for coverage under the Nationwide policy.

Subsequently, at Nationwide's request, the Hattons submitted separate examinations under oath ("EUOs") on March 15, 2018. [See DE 18-1; DE 18-2]. Then, on July 19, 2018, counsel for Nationwide sent a letter to counsel for the Hattons indicating that Nationwide believed that coverage was unavailable to the Hattons due to misrepresentations made on the insurance application. [DE 15-1 at 1, Pg ID 120]. Additionally, the letter indicated that in lieu of immediately denying coverage, Nationwide had decided to file a declaratory judgment action to obtain a declaration of its rights and liabilities before proceeding. [Id. ].

On the same day that it sent the letter, Nationwide filed this declaratory judgment action in federal court. [See DE 1]. According to Nationwide, the Hattons made material misrepresentations when applying for the Nationwide policy, which entitles Nationwide to deny coverage pursuant to the terms of the insurance policy and K.R.S. § 304.14-110. [DE 1 at 4-6, Pg ID 4-6].

In their Answer, the Hattons filed a counterclaim for breach of contract against Nationwide. [DE 9]. Additionally, the Hattons argue that their EUO testimony is inconclusive and that material issues of genuine fact exist pertaining to whether misrepresentations were made during the application process and whether the EUOs are relevant evidence. [DE 19 at 1-8, Pg Id 482-89]. Additionally, the Hattons assert that an employee of the Roark Agency completed the application for insurance on the Hattons' behalf. [DE 15]. As such, the Hattons argue that the Agency is an indispensable party in this matter because the Agency is responsible for any material misrepresentations contained in the insurance application. [Id. ].

As a result, the Hattons move for leave to amend their Answer to assert counterclaims for breach of contract and negligence against the Roark Agency as a third-party plaintiff and a new counterclaim of estoppel against Nationwide. [DE 14]. The Hattons simultaneously move to dismiss this action for lack of subject matter jurisdiction. [DE 15]. Nationwide filed a combined response [DE 18], and the Hattons tendered a combined reply [DE 19], making this matter ripe for review.

III. Analysis

Federal courts are courts of limited jurisdiction and must have subject matter jurisdiction to hear a case. In a diversity action like this one, the Court must apply the substantive law of the forum state and federal procedural law. Gasperini v. Ctr. for Humanities, Inc. , 518 U.S. 415, 427-28, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996) ; Hanna v. Plumer , 380 U.S. 460, 465-66, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965) ; Erie R.R. Co. v. Tompkins , 304 U.S. 64, 78-80, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) ; Hoven v. Walgreen Co. , 751 F.3d 778, 783 (6th Cir. 2014). Thus, "where a federal court is exercising jurisdiction solely because of the diversity of citizenship of the parties, the outcome of the litigation in the federal court should be substantially the same ... as it would be if tried in a State court." Guaranty Trust Co. v. York , 326 U.S. 99, 109, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945).

A. Motion for Leave to Amend and Addition of an Indispensable Party

Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that "a party may amend its pleading only with the opposing party's written consent or the court's leave. The court should freely give leave when justice so requires." "Courts have construed Rule 15 liberally." Schneidt v. J.P. Morgan Chase Bank, N.A. , No. 06-CV-423-JMH, 2007 WL 4328034, at *1 (E.D. Ky. Dec. 10, 2007) (citing Leary v. Daeschner , 349 F.3d 888, 905 (6th Cir. 2003) ). "Leave to file an amended complaint ... should not be denied unless there is evidence of undue delay, bad faith, undue prejudice to the non-movant, or futility." Ziegler v. IBP Hog Market, Inc. , 249 F.3d 509, 519 (6th Cir. 2001) (citing Foman v. Davis , 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962) ).

Here, the Hattons argue that Roark is an indispensable¹ party that must be joined as a third-party plaintiff in this matter. Additionally, they argue that the joinder of Roark as a third-party plaintiff destroys complete diversity of citizenship among the parties and divests the Court of subject matter jurisdiction. But the Hattons have failed to meet their burden to establish that Roark is an indispensable party and, as a result, their Motion to Amend or Correct the Answer to Complaint is denied.

(1) Whether the Roark Agency is an Indispensable Party

(a) Applicable Standard for Mandatory Joinder Under Rule 19

Rule 19 of the Federal Rules of Civil Procedure provides a three-step analysis to determine whether a party must be joined in an action. PaineWebber, Inc. v. Cohen , 276 F.3d 197, 200 (6th Cir. 2001) ; Fed. R. Civ. P. 19. First, the Court must determine if a party that is not joined is a necessary party that should be joined if possible, based on the requirements outlined in Rule 19(a). Soberay Mach. & Equip. Co. v. MRF Ltd., Inc. , 181 F.3d 759, 763–64 (6th Cir. 1999) ; Fed. R. Civ. P. 19(a). Second, if deemed a necessary party, the Court must determine whether the party is subject to personal jurisdiction and can be joined without eliminating the basis for subject matter jurisdiction. Keweenaw Bay Indian Cmty. v. Michigan , 11 F.3d 1341, 1345-46 (6th Cir. 1993) ; Fed. R. Civ. P. 19(a). Third, and finally, the Court must "determine whether, in equity and good conscience, the action should proceed among the existing parties or should be dismissed." Fed. R. Civ. P. 19(b) ; see also Soberay Mach. & Equip. Co. , 181 F.3d at 764. Rule 19(b) provides fours factors to be considered at the third step of the analysis. See Fed. R. Civ. P. 19(b)(1)-(4).

For a party to be deemed necessary or required, the party must meet at least one of the requirements included in Rule 19(a)(1). Thus, the Roark Agency is a required party if:

(A) in [the Agency's] absence, the court cannot accord complete relief among existing parties; or

(B) [the Agency] claims an interest relating to the subject of the action and is so situated that disposing of the action in [the Agency's] absence may:

(i) as a practical matter impair or impede [the Agency's] ability to protect the interest; or(ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.

Fed. R. Civ. P. 19(a)(1).

Here, the Hattons rely heavily on the reasoning of Cas. Indem. Exch. v. High Croft Enters., Inc. , 714 F.Supp. 1190 (S.D. Fla. 1989) to support their contention that the Roark Agency is an indispensable party.² The court in High Croft³ was faced with a nearly identical issue where the insurer filed a declaratory judgment action in federal court after denying coverage of the insured's claim. High Croft acknowledged the reverse alignment that was created by the insurer filing the declaratory judgment action against the claimant and ultimately...