Opinion
Civil No. 02-1218 (DWF/JSM).
November 4, 2004
Timothy E. Branson, Esq., and Angela M. Hall, Esq., Dorsey Whitney, Minneapolis, MN, counsel for Plaintiff.
Edward F. Fox, Esq., and Kevin P. Hickey, Esq., Bassford Remele, Minneapolis, MN, counsel for Defendant.
MEMORANDUM OPINION AND ORDER
Introduction
The above-entitled matter came on for hearing before the undersigned United States District Judge on October 20, 2004, pursuant to Defendant Dynamic Air, Inc.'s ("Dynamic") Motion to Dismiss and Plaintiff Goodyear Tire Rubber Co.'s ("Goodyear") Motion to Certify Question to the Minnesota Supreme Court. For the reasons set forth below, Dynamic's Motion to Dismiss is denied.
Background
Goodyear is an Ohio corporation that manufactures and sells tires and other rubber products. Dynamic is a Minnesota Corporation that manufactures and sells pneumatic conveying equipment for use in industrial plants. This case involves a pneumatic conveying system that Goodyear purchased from Dynamic and later installed in a tire manufacturing plant in Gadsen, Alabama. According to Goodyear, the system was intended to transfer materials from rail cars to silos, and then inside its tire manufacturing facility. Goodyear alleges that the Dynamic system was sold with both express and implied warranties. Goodyear alleges that in February 2000, the pneumatic system began experiencing difficulties and that those difficulties were caused by the defective design and/or manufacture and malfunction of the valves and machinery supplied by Dynamic. Goodyear also claims that the defects in manufacture and/or design led to the contamination of both raw materials and finished tires. Goodyear brought this action seeking recovery of costs and damages in the amount of approximately $2 million.
On May 16, 2001, Goodyear filed its Complaint in the Circuit Court for the Sixteenth Judicial District, Etowah County, Alabama. The case was removed to the United States District Court for the Northern District of Alabama and, pursuant to Dynamic's motion, later transferred to the District of Minnesota on March 31, 2002. Dynamic brought a motion for summary judgment and, by Order dated May 17, 2004 (the "May 17 Order"), the Court dismissed with prejudice Goodyear's claims for negligence, strict liability and misrepresentation. ( See May 17 Order at 10-13.) In addition, the Court denied Dynamic's claim that contractual provisions precluded consequential damages, holding that the UCC allowed for the recovery of such damages. ( See May 17 Order at 10.) Remaining before this Court are Goodyear's claims for breach of contract, breach of express warranty, breach of implied warranty of merchantability, and breach of implied covenant of fitness for a particular purpose.
Dynamic claims that it carried $1 million of primary liability coverage and $6 million in excess-umbrella coverage with Reliance Insurance Company ("Reliance"). In total, Dynamic claims that it carried $7 million in coverage with Reliance (together referred to as the "Reliance policy"). Dynamic asserts that Goodyear's claims fall within the coverage of the Reliance policy. Reliance became insolvent in 2001. The Minnesota Insurance Guaranty Association, an organization of all insurers authorized to transact business in Minnesota, is currently providing Dynamic with a complete defense to Goodyear's claims.
Dynamic asserts that "[f]rom the beginning of this case," it advised Goodyear that its insurer, Reliance, was insolvent. ( See Dynamic Air's Memo. of Law in Support of Motion to Dismiss at 2.) Dynamic also claims that during a settlement conference on June 9, 2004, it reiterated that Dynamic's insurer was insolvent and "also that any recovery would be limited to $300,000 pursuant to the MIGA Act, Minn. Stat., § 60C.09, Subd. 3." ( Id. at 3.) On August 6, 2004, and after a request from Dynamic for a written settlement demand, Goodyear demanded a sum in excess of $300,000. After an August 30, 2004, settlement conference, Dynamic served a Rule 68 Offer of Judgment in the amount of $300,000 (the "Offer of Judgment") upon Goodyear.
Dynamic now makes a motion to dismiss this action as moot and for lack of subject matter jurisdiction. Specifically, Dynamic claims that its Offer of Judgment was made in the full amount of Dynamic's potential liability as allegedly limited by the MIGA Act, therefore rendering this case moot and eliminating the present case or controversy. Goodyear opposes Dynamic's motion and makes its own motion to certify to the Minnesota Supreme Court the question of whether "an insured is immune from further liability, up to its insured limits, once MIGA pays the statutory maximum on a `covered claim,' as defined in Minn. Stat. § 60C.09, or whether Goodyear retains its rights as a plaintiff to pursue its warranty claims against Dynamic, the insured, and have a valid judgment entered in excess of $300,000 against Dynamic." (Goodyear's Memo. of Law in Support of its Motion to Certify Question to the Minnesota Supreme Court at 1.)
Discussion
I. Dynamic's Motion to DismissA. Standard of Review
In deciding a motion to dismiss, the Court must assume all facts in the Complaint to be true and construe all reasonable inferences from those facts in the light most favorable to the complainant. See Morton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986). The Court grants a motion to dismiss only if it is clear beyond any doubt that no relief could be granted under any set of facts consistent with the allegations in the Complaint. Id. The Court may grant a motion to dismiss on the basis of a dispositive issue of law. See Nietzke v. Williams, 490 U.S. 319, 326 (1989). The Court need not resolve all questions of law in a manner which favors the complainant; rather, the Court may dismiss a claim founded upon a legal theory which is "close but ultimately unavailing." Id. at 327.
Moreover, the "`heavy' burden of proving mootness falls on the party asserting the case has become moot." Kennedy Bld'g Assocs. v. Viacom, Inc., 375 F.3d 731, 745 (8th Cir. 2004) (citation omitted). When ruling on a motion to dismiss for alleged lack of subject matter jurisdiction, evidence may be presented by affidavit or otherwise. See Kamen v. Am. Tel. Tel. Co., 791 F.2d 1006, 1011 (2nd Cir. 1986). It is improper for a court to consider "conclusory and hearsay statements contained in . . . affidavits." Id.
B. The Applicability of the MIGA Act
Dynamic asserts that its Rule 68 Offer of Judgment renders this case moot. Specifically, Dynamic contends that as the insured of an insolvent insurer, it is protected by MIGA's $300,000 limitation on the amount of payment of a covered claim. Therefore, Dynamic claims that its $300,000 Offer of Judgment satisfies the statutory maximum that Goodyear could recover in this case, thereby eliminating any case or controversy.
Rule 68 authorizes a defendant to make an offer of judgment to an adverse party to allow judgment to be taken against the defending party. See Fed.R.Civ.P. 68.
Goodyear asserts that Dynamic's motion to dismiss should be denied because Dynamic's Offer of Judgment did not entirely dispose of Goodyear's claims. Moreover, Goodyear asserts that Dynamic has not demonstrated that the MIGA Act applies because, as a threshold matter, Dynamic has failed to demonstrate that: (1) Goodyear's remaining claims are covered by its Reliance policy; and (2) Dynamic meets the net worth requirement of the MIGA Act.
Chapter 60C of the Minnesota Statutes provides for the creation of the Minnesota Insurance Guaranty Association. See Minn. Stat. Chapter 60C. The purposes of the statute are:
to provide a mechanism for the payment of covered claims under certain insurance policies and surety bonds, to the extent provided in this chapter, minimize excessive delay in payment and to avoid financial loss to claimants or policyholders because of the liquidation of an insurer . . .
Minn. Stat. § 60C.02, subd. 2 (2004). The MIGA Act "shall be liberally construed to effect the purposes in subdivision 2." Id., subd. 3. It is clear from a plain reading of the statute that this statute raises competing policy interests, namely to protect both claimants and insureds.
The MIGA Act only applies to "covered claims," a term defined in the statute. See Minn. Stat. § 60C.09. For a claim to be a "covered claim," the claim must be "within the coverage of an insurance policy." Minn. Stat. § 60C.09. Moreover, the statute excludes from the definition of "covered claims" any claims "by an insured whose net worth exceeds $25,000,000 on December 31 of the year prior to the year in which the insurer becomes an insolvent insurer." See Minn. Stat. § 60C.09, subd. 2(3). Net worth includes the value of all subsidiaries and affiliates on a consolidated basis. Id.
Dynamic claims that the MIGA requirements for a "covered claim" are satisfied and has submitted three affidavits in support of this claim. First, Judy A. Bowron, the Executive Director of MIGA, testified by affidavit that following the insolvency of Reliance, MIGA undertook the defense of the claim. ( See Affidavit of Judy A. Bowron at ¶ 2.) Bowron also testified that MIGA considered whether the matter presented "a covered claim" under the MIGA Act and, as part of its review of the claim, "MIGA obtained financial information from Dynamic Air that led MIGA to conclude that . . . the net worth of Dynamic Air did not exceed the $25 million threshold . . . under the MIGA Act." ( Id. at ¶ 2.) Bowron further testified that MIGA approved the $300,000 payment of Goodyear's claim as reflected in Dynamics Offer of Judgment. ( Id. at 5.)
Dynamic also submitted the Affidavit of James R. Steele, the President of Dynamic. In his affidavit, Steele testified, among other things, that "[i]n recent years [Dynamic's] total annual revenue has only been approximately $20 Million," that MIGA is providing Dynamic with a complete defense, and that "MIGA has determined that Goodyear's claims fall within the coverage of the Reliance policy." ( See Affidavit of James R. Steele at ¶¶ 2, 5.) In a supplemental affidavit submitted with Dynamic's reply brief, Steele stated that "Dynamic Air's net worth in 2000, the year prior to Reliance's insolvency, was substantially less than $25 Million, including all of Dynamic Air's subsidiaries and affiliates as calculated on a consolidated basis." ( See Supplemental Affidavit of James R. Steele at ¶ 5.)
1. Coverage of Reliance Policy
Goodyear asserts that Dynamic failed to demonstrate that Goodyear's remaining claims are covered by the Reliance policy. Goodyear claims that because Dynamic did not submit the Reliance policies as record evidence with explanation as to where coverage is provided, the Court cannot assess Dynamic's conclusion that the policies provide coverage. Goodyear further asserts that "it appears that Goodyear's remaining claims are excluded under the Reliance policies." ( See Goodyear's Memo. of Law in Opp. to Dynamic's Motion to Dismiss at 4, 6-8.) In support of this assertion, Goodyear claims that both the Reliance Commercial General Liability Coverage ("CGL") Part and the Reliance Excess-Umbrella Coverage Form exclude coverage of Goodyear's breach of contract and warranty claims. ( See id. at 4-5.) The Reliance primary CGL Coverage Part states, in part, as follows:
2. Exclusions.
Insurance under Coverage A. Bodily Injury and Property Damage Liability does not apply to:
* * *
b. Contractual liability
bodily injury or property damage for which the insured is obligated to pay as damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:
(1) assumed in a contract or agreement that is an insured contract provided that the bodily injury or property damage occurs subsequent to the execution of the contract or agreement; or
(2) that the insured would have in the absence of the contract or agreement.
( See Affidavit of Bryan C. Keane at Ex. 1 at p. 1 (bold in original).)
The Reliance Excess-Umbrella Coverage Form contains the same exclusion under the heading "Assumed Liability." ( See Keane Aff. at Ex. 2 at p. 2.)
In response, Dynamic claims that the above contractual liability exclusion is inapplicable because: (1) it refers to a situation in which the insured expressly assumes the liability of a third party; and (2) it does not apply to the ordinary risk represented by the insured's own business operations through contract or otherwise.
Construction of an insurance policy presents a question of law for the court based on the plain meaning of the policy language. See Wanzek Constr., Inc. v. Employers Ins. of Wausau, 679 N.W.2d 322, 324 (Minn. 2004). Any ambiguity in the policy language is construed in favor of the insured, while exclusions are read narrowly against the insurer. See id.; see also Auto-Owners Ins. Co. v. NewMech Cos., Inc., 678 N.W.2d 477, 483 (Minn.Ct.App. 2004).
Keeping the above standards in mind, the Court finds that the above exclusion in the Reliance policy does not apply here. The language of the exclusion and the reasoning of cases analyzing similar exclusion provisions supports the conclusion that the contractual liability exclusion negates coverage for damages the insured must pay by reason of the assumption of liability of a third party in a contract or agreement, such as an indemnification or agreement to hold harmless. See, e.g., Sphere Drake Ins. Co. v. Tremco, Inc., 513 N.W.2d 473, 481 (Minn.Ct.App. 1994); accord Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65, 80-81 (Wis. 2004) (holding a contractually-assumed liability exclusion applies where the insured has contractually assumed the liability of a third party and does not operate to exclude coverage for liabilities to which the insured is exposed under the terms of the contracts it makes generally). There is no evidence that Dynamic ever assumed the liability of any third party in connection with the Gadsen Plant. Therefore, the Court finds that Goodyear's remaining claims against Dynamic are covered by the Reliance policy.
The Court finds the reasoning in American Family, instructive on this point: "The term `assumption' must be interpreted to add something to the phrase `assumption of liability in a contract or agreement.' Reading the phrase to apply to all liabilities sounding in contract renders the term `assumption' superfluous." Am. Fam. Mut. Ins. v. Am. Girl, Inc., 673 N.W.2d 65 at 80-81 (Wis. 2004).
Goodyear references TGA Dev., Inc. v. N. Ins. Co., to support its interpretation of the exclusion provision. TGA, 62 F.3d 1089, 1091-92 (8th Cir. 1995). Contra Golf Cars of Ak., Inc. v. Union Standard Ins. Co., 2003 WL 21229106 (Ark.App. 2003) (citations omitted). Although the Court disagrees with Goodyear's interpretation, at most this case indicates that the Reliance exclusion language is ambiguous, and as such must be construed against the insurer. See also Sphere Drake, 513 N.W.2d at 481 (quoting the Florida Court of Appeals' construction of a similar exclusion finding: "What this [`liability assumed'] means is debatable. It is at least arguable that it means that the insurance company is not liable to an insured which gratuitously undertakes to act as surety or which undertakes contractual obligations not arising as a matter of law in the conduct of its business.").
2. Dynamic's Net Worth
Goodyear also contends that Dynamic failed to submit any direct evidence relating to its net worth that would allow this Court to determine whether the MIGA Act properly applies. Instead, Goodyear claims that the assertions made in the Steele and Bowron affidavits consist of conclusory and unsupported statements that the Court cannot consider.
The Court agrees. Dynamic asks this Court to accept and rely on conclusory and unsupported assertions made in the Bowron and Steele affidavits that Dynamic's net worth met the MIGA Act's statutory minimum. Considering that Dynamic also asks this Court to interpret the MIGA Act in a way that would effectively cap — and potentially reduce — Goodyear's recovery regardless of this Court's judgment, this Court refuses to accept Dynamic's net worth claims without direct evidence. See, e.g., Kamen v. Am. Tel. Tel. Co., 791 F.2d at 1011.
Dynamic argues that Goodyear lacks standing to challenge MIGA's determination that this is a "covered claim." ( See Dynamic Air's Reply Memo. in Support of Motion to Dismiss at 4.) The Court disagrees. This case does not involve a typical defendant/insured relationship. Instead, because Dynamic claims to be covered by the MIGA Act, which Dynamic argues will limit Goodyear's potential recovery, Goodyear's interests are directly and potentially adversely affected. The Court rejects the notion that it must rely on conclusory affidavit assertions that MIGA applies without sufficient direct evidence supporting that conclusion. The cases cited by Dynamic in support of its "lack of standing" argument are factually distinguishable from this case and, therefore, are not persuasive.
If the MIGA Act does not apply to Goodyear's claims, there is no doubt that Goodyear could potentially recover more than $300,000. Therefore, it is not clear beyond any doubt that no relief could be granted under any set of facts consistent with the allegations in the Amended Complaint. In addition, even if the MIGA Act applied, and the court were to accept Dynamic's interpretation of the Act, Goodyear's claims are not mooted by Dynamic's Offer of Judgment. Specifically, if in that case Goodyear should be awarded judgment exceeding $300,000, Dynamic has failed to convince the Court that Goodyear would be precluded from seeking recovery from the liquidator of Reliance. Accordingly, the Court denies Dynamic's motion to dismiss.
C. Limitation of Amount of Claim Under the MIGA Act
The main issue in both motions before the Court is whether the MIGA Act's "limitation of amount" provision protects Dynamic from any liability for the claims made by Goodyear once MIGA has made payment under the statute. Minn. Stat. § 60C.09, subd. 3, provides:
Payment of a covered claim, whether upon a single policy or multiple policies of insurance, is limited to no more than $300,000. In the case of claim for unearned premium by a single claimant, the entire claim up to $300,000 shall be allowed excluding retrospective or experience-rated insurance plans or premiums subject to adjustment after termination of the policy. The limitation on the amount of payment for a covered claim does not apply to claims for workers' compensation insurance. In no event is the association obligated to the policyholder or claimant in an amount in excess of the obligation of the insurer under the policy from which the claim arises. For insolvencies occurring on or after October 1, 1985, no deductible applies to claims eligible for payment under the assigned claims plan under sections 65B.63 to 65B.65.
Dynamic claims that this section caps Goodyear's recovery at $300,000 and that the legislative intent to this effect is found in the plain meaning of the MIGA Act. Dynamic also claims that two Minnesota appellate court decisions and a state trial court opinion that was recently heard by the Court of Appeals all support the conclusion that the policyholder of an insolvent insurer cannot be held personally liable for the difference between the limitation of payment under the MIGA Act and the limits of its insurance policy. These cases are Unique Sys. Dev., Inc. v. Star Agency, 500 N.W.2d 144, 147 (Minn.Ct.App. 1993), Minn. Mining Mfg. Co. v. HW Motor Express Co., 507 N.W.2d 622, 624 (Minn.Ct.App. 1993), and Van Guilder v. Nat'l Freight, Inc., File No. CX-02-349 (County Dist. Ct. August 18, 2003) aff'd in part and rev'd in part, 686 N.W.2d 339 (Minn.Ct.App. 2004).
Goodyear disputes that the above-cited cases are controlling. Specifically, Goodyear claims that the issue presented in this case was not addressed in the cases relied upon by Dynamic and that Dynamic inappropriately relies on dicta to support its arguments. Goodyear asserts that even if the MIGA Act applies, it provides only limited protection and compensation when an insurance company fails, but does not immunize Dynamic from liability in excess of $300,000. Goodyear asserts that its interpretation of the statute is supported by the language of the MIGA Act, and to the extent that any ambiguity in the language of the MIGA Act exists, the legislative history demonstrates that the legislature intended solely to preclude insurers, not injured third-party claimants, from asserting claims against an insured of an insolvent insurer once the MIGA Act paid its maximum obligation. Goodyear also relies on opinions from other states interpreting similar versions of the MIGA Act, which is based on a model statute, and argues that when the issue has actually been presented for a decision, courts have held that a non-insurer is entitled to recover directly from the insured of the insolvent insurer.
Goodyear claims that the limitation language found in Minn. Stat. § 60C.09, subd. 3, deals expressly with the obligations of "the association" to insured and claimants and is silent on the insured's obligations to a claimant.
Goodyear discusses legislative history and testimony related to a 1988 amendment to the MIGA Act, as well as history related to the National Association of Insurance Commissioner's Model Act. With respect to this history, Goodyear appears to rely on the absence of any discussion or indication of legislative intent to bar a third-party claimant from recovering from a liable defendant once the guarantee association payed its statutory maximum.
Because the Court has determined that Dynamic failed to establish that the MIGA Act applies here, the Court need not reach the issue of whether the MIGA Act shields Dynamic from direct liability at this time. However, if Dynamic is able to demonstrate that the MIGA Act applies, this issue will likely resurface at any enforcement or post-judgment stage of this litigation. Therefore, the Court believes the most prudent course of action is to either make a determination on this issue or, if appropriate, certify the issue to the Minnesota Supreme Court. While it is difficult for the Court to accept Dynamic's proposed interpretation of the MIGA Act, the Court also acknowledges that it may be difficult to reconcile certain language found in Unique Systems, 3M, and Van Guilder with Goodyear's proposed reading of the statute. The Court notes that neither party cited to any relevant legislative history related to the MIGA Act predating 1998. The Court feels that such an analysis would be helpful in this case. Therefore, the Court hereby orders the parties to submit additional briefing that cites to and analyzes legislative history (particularly prior to 1998) that is relevant to the parties' proposed interpretations of MIGA's "limitation of amount" provision section 60C.09, subd. 3. The parties' briefs shall be no longer than five pages in length and shall be submitted within 20 days of this order.
II. Goodyear's Motion to Certify Question to the Minnesota Supreme Court
Goodyear moves this Court to certify to the Minnesota Supreme Court the question of whether an insured is immune from further liability, up to its insured limits, once MIGA pays the statutory maximum on a "covered claim," as defined in Minn. Stat. § 60C.09, or whether Goodyear retains its rights as a plaintiff to pursue its warranty claims against Dynamic and to have a valid judgment entered in excess of $300,000 against Dynamic. Goodyear asserts that certification is appropriate because the Minnesota Supreme Court has not yet determined whether or not payment by MIGA of the statutory maximum on a covered claim immunizes insureds, up to their policy limits, from further liability to the actual injured parties. Further, Goodyear claims that a ruling on this issue by the Minnesota Supreme Court will have a major impact on these proceedings.
Dynamic contends that certification is improper because there are Minnesota appellate court decisions which address the specific question at issue. Dynamic also argues, in the alternative, that if the Court determines that certification is justified, the actual issue "is whether the policyholder of an insolvent insurer can be held personally liable for the difference between the statutory cap under Minn. Stat. § 60C.09, subd. 3, and the limits of its insurance coverage from the insolvent insurer." (Dynamic Air's Memo. in Opp. to Motion to Certify Question.)
The Minnesota Supreme Court "may answer a question of law certified to it by a court of the United States . . . if the answer may be determinative of an issue in pending litigation in the certifying court and there is no controlling appellate decision, constitutional provision, or statute of this state." See Minn. Stat. § 480.065, subd. 3. Certification rests in the sound discretion of the federal court. See Lehman Bros. v. Schein, 416 U.S. 386, 391 (1974); Clark v. Lindquist, No. Civ. 03-4542, 2003 WL 22697172 (D. Minn. November 12, 2003).
It is undisputed that if the MIGA Act applies, the question of whether the MIGA Act shields Dynamic from direct liability under the facts of this case will be determinative of an issue before the Court. The parties, however, do not agree on the issue of whether there is a controlling appellate decision, constitutional provision, or statute that resolves the question at issue. Because the Court has requested further briefing on the issue, the Court will defer its ruling on certification until it has had an opportunity to consider any additional arguments made by the parties.
Based on these considerations, IT IS HEREBY ORDERED:
1. Dynamic's Motion to Dismiss (Doc. No. 80) is DENIED.
2. Both Plaintiff and Defendant shall submit a memorandum consistent with this order, not more than five pages in length, within 20 days.
The Court reserves the right to set the matter on for oral argument upon receipt and review of the memorandums.