Opinion
Bankruptcy 18-33707 Adversary Proc. 18-03094
05-09-2022
In re: Diocese of Winona-Rochester, Debtor. v. United States Fire Insurance Company, et al., Defendants. DW Harrow & Associates, LLC, as Trustee of the Diocese of Winona-Rochester Settlement Trust, Plaintiff,
MEAGHER & GEER, PLLP Charles E. Spevacek MEISSNER TIERNEY FISHER & NICHOLS S.C. Michael J. Cohen, Pamela J. Tillman, George R. Calhoun Admitted Ifrah PLLC Attorneys for United States Fire Insurance Company.
MEAGHER & GEER, PLLP Charles E. Spevacek MEISSNER TIERNEY FISHER & NICHOLS S.C. Michael J. Cohen, Pamela J. Tillman, George R. Calhoun Admitted Ifrah PLLC Attorneys for United States Fire Insurance Company.
AMENDED NOTICE OF HEARING AND MOTION ON DEFENDANT'S MOTION TO DISMISS THE AMENDED COMPLAINT
WILLIAM J. FISHER, United States Bankruptcy Judge.
INTRODUCTION
TO: The Debtor(s) and Plaintiff DW Harrow & Associates, LLC, as Trustee of the Diocese of Winona-Rochester Settlement Trust.
1.Defendant United States Fire Insurance Company moves the Court for the relief requested below and gives notice of hearing.
2.The Court will hold a telephonic hearing on this motion on February 9, 2022 at 10:00 a.m. CST. Please use the following dial in instructions:
Dial: 1-888-684-8852
When prompted, enter ACCESS CODE: 5988550
When prompted, enter SECURITY CODE: 0428
3. Any response to this motion must be filed and served not later than February 4, 2022, which is five days before the time set for the hearing (including Saturdays, Sundays and holidays). UNLESS A RESPONSE OPPOSING THE MOTION IS TIMELY FILED, THE COURT MAY GRANT THE MOTION WITHOUT A HEARING.
4.This Court has jurisdiction over this motion pursuant to 28 U.S.C. §§ 157 and !334, FRBP 5005 and Local Rule 1070-1. This proceeding is a non-core proceeding. The petition commencing this chapter 11 case was filed on November 30, 2018. The Debtor's Fifth Amended Joint Chapter 11 Plan of Reorganization was confirmed by this Court on October 14, 2021.
5. This motion arises under FRBP 7012. This motion is filed under FRBP 9013 and Local Rule 7007-1. Movant requests relief in the form of an Order dismissing Plaintiffs Amended Complaint without prejudice, or in the alternative, dismissing Counts II, III, and TV and requests for relief ¶¶ 107 b., c, and d., of the Amended Complaint.
The grounds for this relief are more fully articulated in the accompanying Memorandum of Law, which is incorporated by reference herein. In brief, Plaintiffs Amended Complaint alleges exclusively non-core matters, which can have no conceivable effect on the Debtor's estate. Accordingly, the Court is without jurisdiction over the Amended Complaint. Alternatively, Counts II, III, and IV, and the correlative prayers for relief, assert claims for insurance "bad faith" that are not cognizable under Minnesota law, and should therefore be dismissed.
WHEREFORE, Defendant United States Fire Insurance Company moves the Court for an Order dismissing the Amended Complaint without prejudice, or in the alternative, dismissing Counts II, III, and TV and the correlative prayers for relief, and such other relief as may be just and equitable.
CERTIFICATE OF SERVICE
The undersigned certifies that on January 20, 2022, a copy of the foregoing document was filed electronically with the Clerk of Court, using the Court's CM/ECF system, which will send electronic notification of the filing to those parties who have appeared and are registered as CM/ECF participants in this matter. Dated: January 20, 2022 MEAGHER & GEER, PLLP
DEFENDANT'S MEMORANDUM OF LAW IN SUPPORT OF MOTION TO DISMISS THE AMENDED COMPLAINT
INTRODUCTION
Plaintiffs Amended Complaint exclusively presents non-core claims related to an insurance dispute concerning the Diocese of Winona-Rochester's coverage for various sexual abuse claims against it, under insurance policies issued by Defendant United States Fire Insurance Company ("U.S. Fire"). This insurance dispute pre-dates the Diocese's bankruptcy proceedings and, the Diocese having assigned its rights under the policies to Plaintiff in exchange for claimants' covenants not to pursue recovery against it, this dispute has no conceivable impact on the Debtor's estate. Accordingly, U.S. Fire moves for dismissal pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Because the Amended Complaint raises only non-core matters which plainly will have no impact on the Debtor's estate, this Court lacks subject matter jurisdiction over it. As a result, this action should be dismissed, with leave for Plaintiff to refile in a court with proper jurisdiction.
As referred to herein, "Debtor" is the Diocese of Winona-Rochester (or the "Diocese"), whose Fifth Amended Joint Chapter 11 Plan of Reorganization (the "Plan") was confirmed by the bankruptcy court on October 14, 2021. Pursuant to the terms of the Plan, the Plaintiff, the Trustee of the Diocese of Winona-Rochester Settlement Trust (hereinafter "Plaintiff or "Trustee") was substituted as the real party in interest in this coverage action by order entered December 5, 2021. As used herein, "Insured" also refers to the Diocese.
Alternatively, the Amended Complaint alleges several causes of action which are not cognizable under long-standing, clearly stated, and oft-repeated tenets of Minnesota law. Namely, Counts II and III of the Amended Complaint, together with requests for relief paragraph 107. b. and c, are predicated upon variously stated allegations of U.S Fire's "bad faith" misconduct in its handling of what are labeled the "Adamson Claims" (claims that U.S. Fire refused to defend or indemnify, and which have been resolved with no exposure to the Insured). The Amended Complaint asserts similar claims in Count IV, and requests for relief paragraph 107. c. and d., in connection with U.S. Fire's alleged "bad faith" handling of the "Non-Adamson Claims" (claims U.S. Fire is defending, without reservation, and all of which remain pending). Minnesota law does not recognize the bad faith causes of action asserted, or the damages sought, in regard to the Adamson and Non-Adamson Claims. Thus, all three Counts and their associated requests for relief, together with the Amended Complaint's myriad passing references to "bad faith" or its synonyms (i.e., that contained in paragraphs 1 and 50-54 of the Amended Complaint), must be dismissed for failure to state a claim upon which relief can be granted.
STATEMENT OF FACTS
The undisputed facts relevant to this motion are few, simple, and come straight from the allegations in Plaintiffs Amended Complaint.
With regard to the Adamson Claims - claims against the Diocese and other Diocesan entities (including parishes and schools) alleging sexual abuse by Father Thomas Adamson - Plaintiff acknowledges that U.S. Fire never undertook the defense of the Diocese and other Diocesan Entities against those claims^ (Am. Compl. ¶ 12.) Plaintiff further acknowledges that the Adamson Claims were settled under Miller v. Shugart, 316 N.W.2d 719 (Minn. 1982); that various stipulated judgments were entered pursuant to the resulting Miller-Shugart Agreements; and that as part of those Miller-Shugart Agreements, the Adamson Claimants covenanted not to execute on the stipulated judgments entered against the Diocese, and to seek recovery on such stipulated judgments only against U.S. Fire^ (Am. Compl. ¶¶ 14, 49, 58-59-)
As for the claims that allege sexual abuse by individuals other than Father Thomas Adamson (the "Non-Adamson Claims"), Plaintiff acknowledges those 54 claims are all still pending; that no judgments have been entered against the Diocese on those claims; and that U.S. Fire has agreed to defend and indemnify the Diocese with respect to the Non-Adamson Claims, without reservation, subject to disputes related to several alleged lost policies and various parishes' and schools' disputed claims of "additional insured" coverage. (Am. Compl. ¶¶ 50, 53"54-)
STANDARD OF REVIEW
Where a moving party challenges the Court's subject-matter jurisdiction on the face of the complaint, the standard of review under Rule 12(b)(1) is the same as that applicable to a motion to dismiss for failure to state a claim under Rule 12(b)(6). Osborn v. United States, 918 F.2d 724, 729 n.6 (8th Cir. 1990); see also Fed. R. Bankr. P. 7012 ("Rule I2(b)-(i) F.RCiv.P. applies in adversary proceedings."). Namely, the Court must "accept as true all factual allegations in the complaint, giving no effect to conclusory allegations of law," and determine whether the plaintiffs alleged facts "affirmatively and plausibly suggest" that jurisdiction exists. Stalley v. Catholic Health Initiatives, 509 F.3d 517, 521 (8th Cir. 2007). The Court's review is limited to the face of the pleadings. Branson Label, Inc. v. City of Branson, 793 F.3d 910, 914 (8th Cir. 2015).
To survive a motion to dismiss, a complaint must contain "enough facts to state a claim to relief that is plausible on its face." BellAtl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim will have "facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged," Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), and pleads factual content that raises that plaintiffs right to relief beyond a speculative level and shows more than just a "possibility" of a claim. Id. at 679; see also Twombly, 550 U.S. at 557.
The Court need not accept as true wholly conclusory allegations or legal conclusions couched as factual allegations. Hager v. Arkansas Dep't of Health, 735 F.3d 1009, 1013 (8th Cir. 2013). Accordingly, courts are required to "disregard conclusory and boilerplate statements in the pleadings to determine whether, without those, the plaintiff has alleged sufficient factual matter to state a claim for relief that is plausible on its face." Iqbal, 556 U.S. at 678, 681 ("A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'") (quoting Twombly, 550 U.S. at 555). Rather, the complaint must allege sufficient facts with enough specificity "to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555. "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements," are insufficient. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. At 555).
ARGUMENT
I. THIS COURT LACKS SUBJECT MATTER JURISDICTION OVER THE CLAIMS RAISED IN THE AMENDED COMPLAINT.
The Amended Complaint should be dismissed because the Court lacks subject matter jurisdiction over all of the claims raised in this action. As an initial matter, it is indisputable that the Amended Complaint raises non-core issues. Indeed, the debtor in this action, the Diocese of Winona-Rochester, confirmed its chapter 11 plan in October 2021 and is no longer in bankruptcy and no longer a party to this action. Because the matters raised in the Amended Complaint are non-core matters that have no conceivable impact on the bankruptcy estate, this Court lacks jurisdiction to hear the dispute.
A. Applicable Law
"The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute." Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995). Its subject matter jurisdiction is in rem and is limited to the res of the estate. Central Virginia Cmty. College v. Katz, 546 U.S. 356, 362 (2006) ("Bankruptcy jurisdiction, at its core, is in rem."). Congress has vested the district courts with "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). Pursuant to section 157 of title 28 of the United States Code, a district court may refer "all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11... to the bankruptcy judges for the district." 28 U.S.C. § 157(a). This Court received its jurisdiction pursuant to such a referral in Local Rule 1070-1.
In 28 U.S.C. § 157(a), Congress divided bankruptcy proceedings into three types: (1) those that "arise under" title 11; (2) those that "arise in" a title 11 case; (3) and those that are "related to" a title 11 case. Cases that "arise under" or "arise in" a title 11 matter are known as core bankruptcy proceedings, while "related to" proceedings are non-core. 28 U.S.C. § I57(b)(i)-(2)(C). The core vs. non-core distinction is critical when assessing a bankruptcy court's constitutional authority to enter a final judgment disposing of that proceeding. A bankruptcy court lacks the constitutional authority to enter a final judgment in a proceeding over which it has only "related to" subject matter jurisdiction unless all parties consent. See Stern v. Marshall, 564 U.S. 462 (2011). In Stern, the Supreme Court held that a bankruptcy court lacked constitutional power to adjudicate and enter judgment on a counterclaim asserted by a debtor, Vickie Marshall (a/k/a Anna Nicole Smith) in an adversary proceeding that a creditor (her stepson) had filed against her. The counterclaim (for tortious interference with an inter vivos gift from the debtor Marshall's late husband, who was also the creditor's father) did not arise under title 11, nor did it arise in a title 11 case. Even though the claim was asserted in the context of a bankruptcy proceeding, it existed prior to and was independent of debtor Marshall's bankruptcy case. The Supreme Court ruled that Congress could not "withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at common law, or in equity, or in admiralty." Id. (quoting Murray's Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272, 284 (1855)). Because Marshall's counterclaim for tortious interference was just such a claim, it could only be adjudicated to final judgment by an Article III court; and Congress had no power to alter that simply because the counterclaim might have "some bearing on a bankruptcy case." Stern, 564 U.S. at 499. Bankruptcy courts, thus, have limited power to issue orders in matters that are before them pursuant to their "related to" jurisdiction.
After a plan is confirmed, however, a bankruptcy court's jurisdiction is even more limited. "Once the bankruptcy court confirms a plan of reorganization, the debtor may go about its business without further supervision or approval. The firm also is without the protection of the bankruptcy court. It may not come running to the bankruptcy judge every time something unpleasant happens." Pettibone Corp. v. Easley, 935 F.2d 120, 122 (7th Cir. 1991) (emphasis in original).
The Eighth Circuit applies the "conceivable effect" test in order to determine the existence of "related to" jurisdiction. In re McDougall, 587 B.R. 87, 90 (B.A.P. 8th Cir. 2018). Within the Eighth Circuit,
the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in the bankruptcy.... An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action ... and which in any way impacts upon the handling and administration of the bankruptcy estate.Dogpatch Props., Inc. v. Dogpatch U.S.A., Inc. (In re Dogpatch U.SA., Inc.), 810 F.2d 782, 786 (8th Cir. 1987) (quotation omitted). A bankruptcy court's "related to jurisdiction is broad, but it is not without limits and 'bankruptcy courts have no jurisdiction over proceedings that have no effect on the estate of the debtor.'" In re McDougall, 587 B.R. at 91 (citing Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6 (1995)). Bankruptcy jurisdiction only encompasses proceedings that bear on the remedies administered in bankruptcy, the federal process for resolution of broader financial distress that necessarily must have a closed end at some point in relation to such resolution. In re Farmland Indus., Inc., 567 F.3d 1010, 1019 (8th Cir. 2009) ("Although '[proceedings "related to" the bankruptcy include ... suits between third parties which have an effect on the bankruptcy estate,' related to jurisdiction does not exist here because the McDougalls' claim would not have an effect on the bankruptcy estate." (quoting Celotex Corp., 514 U.S. at 307 n.5)). Suits that do not affect administration of an estate are not within the bankruptcy court's jurisdiction.
B. Discussion
The Diocese's original complaint, filed back in 2018 even before commencement of its chapter 11 bankruptcy action, contained only a single claim for a declaratory judgment that "the Insurers are liable for the Underlying Actions and Claims a[s] required by the terms of the Insurance Policies and Certificates." Although it purports to be a mere amendment, the Amended Complaint contains six new claims and is an entirely new action. Each of those claims differs substantially from the relief sought in the original complaint.
Indeed, since U.S. Fire accepted coverage for the Non-Adamson Claims without reservation (see Am. Compl. ¶ 52), the relief sought as to those claims in the original action is moot.
The Bankruptcy Court's jurisdiction is set by statute and is limited. At a minimum, the Court lacks constitutional jurisdiction to render a final decision over the non-core matters raised in the Amended Complaint. That much should not be contested. The claims raised in the Amended Complaint do not fall within this Court's subject matter jurisdiction at all. There is no reason to have these insurance coverage matters clogging the Court's docket when the state court or district court can readily decide the issues raised in the Amended Compliant.
Because the Amended Complaint raises indisputably non-core state law insurance issues, U.S. Fire seeks to withdraw the reference of the Complaint in conjunction with or in addition to this motion to dismiss.
The claims in the Amended Complaint can have no conceivable effect on the Debtor's estate. The Debtor has been released, or has received the benefits of covenants not to sue or collect, and is no longer in bankruptcy. That was the bargain between the abuse claimants and the Debtor. Whether a claimant recovers from U.S. Fire will have no impact on the overall plan or the Debtor's estate. Review of the Plan and the Amended Complaint confirms this.
Indeed, it remains to be seen if any claimant will even opt to pursue individual claims against U.S. Fire as a Litigation Claim under Section 6.14(c) of the Plan.
Count I asserts a state law breach of contract claim for allegedly breaching a duty to defend the Adamson claims. This is a classic non-core coverage issue that does not depend on or affect any aspect of the now-concluded bankruptcy case.
Count II asserts a state law breach of contract claim for allegedly breaching a duty to accept alleged reasonable settlements of the Adamson Claims. Putting aside the legal absurdity of the substance of this argument (as discussed below), the claim presents another non-core issue that does not impact the Debtor's estate or any issue of bankruptcy administration.
Count III asserts a state law "common law" bad faith failure to settle the Adamson Claims. Count IV similarly asserts a state law "common law" bad faith failure to settle the Non-Adamson Claims. Both Count III and IV are non-core and will not impact the administration of the estate because the estate has been relieved from liability for the Non-Adamson Claims through the Plan. Indeed, with respect to the Non-Adamson Claims, the Plan provides every claimant with a potentially covered claim the opportunity to opt to become a litigation claimant and pursue a possible recovery from U.S. Fire. The Debtor's estate has no obligation to defend those actions - U.S. Fire will - and the estate can obtain no recovery from U.S. Fire.
Count V seeks a declaration that the Miller-Shugart settlements entered into by the Debtor are reasonable. This is a classic non-core coverage issue that does not depend on or affect any aspect of the now-closed bankruptcy case. Notably, this claim never belonged to the bankruptcy estate; claims for collection of the Miller-Shugart settlements belong to the creditors that are claimants against the Trust.
Count VI seeks a declaration concerning the existence, terms, and limits of alleged lost policies. Again, this is a classic non-core coverage issue that does not depend on or affect any aspect of the now-closed bankruptcy case.
None of these claims will impact the estate. The plaintiff in this case is the Trust - not the estate. Once the Debtor funded the trust, the connection between the trust and the estate was severed. See In re McAlpin, 278 F.3d 867 (8th Cir. 2002) (affirming Bankruptcy Appellate Panel Ruling that bankruptcy court lacked subject matter jurisdiction over post-confirmation claim objection); In re Fairfield Cmtys., Inc., 142 F.3d 1093, 1095 (8th Cir. 1998) (once bankruptcy debtor's reorganization plan has been confirmed, debtor's estate, and thus bankruptcy court's jurisdiction, ceases to exist; bankruptcy court is not meant to protect parties with regard to post-confirmation matters). Indeed, this Court recently addressed an identical jurisdictional issue in dealing with a trust created under Minnesota law:
The A.P.I. Trust and its corpus do not substitute for a bankruptcy estate. This trust was funded in large part by assets that were once property of the Debtor's bankruptcy estate, i.e. assets of the Debtor and the rights to
indemnification under liability insurance policies owned by the Debtor, later monetized into funds paid by insurers in consideration for the protection of the channeling injunctions. But once paid into the Trust, those assets became the property of a different entity-one established under Minnesota law, not § 541 of the Bankruptcy Code-and one administered by a trustee empowered under the same state-law governance and not having fiduciary status directly imposed by federal statute. The only bankruptcy estate cognizable in the Debtor's case ceased to exist after the Plan was consummated on its effective date and the A. P. I. Trust was activated.
And, need it be said, for any relationship to the other type of bankruptcy relief identifiable to core-proceeding status, the Debtor received its discharge under Chapter 11 long ago and it is now a stranger to the controversy at bar.In re API Inc., 537 B.R. 902, 909-10 (Bankr. D. Minn. 2015) (footnotes omitted). Once an "asset is no longer property of the bankruptcy estate the proceeding no longer has core status under 28 U.S.C. § i57(b)(2)(K)."/n reLe, 537 B.R. 913, 919 (Bankr. D. Minn. 2015) (citing In re Holmes, 387 B.R. 591, 598-99 (Bankr. D. Minn. 2008) and Abramowitz v. Palmer, 999 F.2d 1274, 1276-77 (8th Cir. 1993) (holding that core-proceeding status of action to determine competing claims to debtor's asset lapses when debtor's claim of exemption to asset is allowed and asset passes out of bankruptcy estate)).
Here, as in API, the reorganized debtor - the Diocese - received its discharge and has no obligation to reimburse the trust for any shortfall in insurance proceeds (or for any reason whatsoever). See Plan at § 6.7(f). The U.S. Fire policies are no longer property of the estate because the Debtor assigned its interest in those policies and any right to pursue the present claims to the Trust. See Plan at §§ 1.1(106), 5.1(b)(3), 6.2, 6.7. This case is, therefore, unlike In re Farmland Industries, Inc., in which the Eighth Circuit held that such an indemnification obligation did create a conceivable impact on the debtor's estate that would give rise to "related to" jurisdiction. 567 F.3d at 1019 (finding jurisdiction where liquidating trustee was ''advancing money out of the bankruptcy estate to [third parties] as they incur legal fees in defending'' against third party claim).
Moreover, neither the Plan nor the Bankruptcy Code has an impact on the issues raised in the Amended Complaint. The Plan expressly contemplates that future coverage actions would occur outside of bankruptcy. Section 8.4 of the Plan, which generally provides that the Plan has no impact on coverage issues, provides that the parties to a future "coverage, garnishment action, or other proceeding related to a Non-Settling Insurer" can enforce the Plan's neutrality provisions in such action if necessary. There is no requirement that such action, which is a non-core proceeding, be venued in the bankruptcy court. Accordingly, this Court lacks subject matter jurisdiction and should dismiss the Amended Complaint without prejudice to refile in a court with jurisdiction.
II. COUNTS II, III, AND IV OF THE AMENDED COMPLAINT, THE CLAIMS FOR DAMAGES ASSOCIATED WITH THOSE COUNTS, AND THE SUNDRY ALLEGATIONS OF "BAD FAITH" SCATTERED THROUGHUT THE AMENDED COMPLAINT SHOULD BE DISMISSED BECAUSE MINNESOTA LAW DOES NOT RECOGNIZE SUCH CLAIMS OR DAMAGES.
A. Applicable Law
In Minnesota, the damages available to an insured for its insurer's breach of contract are generally limited to the damages awardable under the contract. See Wild v. Rarig, 234 N.W.2d 775, 789 (Minn. 1975) ("[W]hen a plaintiff seeks to recover damages for an alleged breach of contract he is limited to damages flowing only from such breach___"); Pillsbury Co. v. Nafl Union Fire Ins. Co. of Pittsburgh, 425 N.W.2d 244, 249 (Minn.Ct.App. 1988) (applying Wild's holding to a claim for bad faith breach of an insurance contract). In other words, the compensation for a wrongful refusal to defend is an award of the defense fees and costs payable under the contract; and the compensation for a wrongful refusal to indemnify is an award of the indemnity benefits payable under the contract. Extra-contractual damages - damages beyond those payable under the contract breached, including tort damages - are generally not available to the insured under Minnesota law.
This rule follows from Minnesota courts' long-standing holding that no per se fiduciary relationship exists between an insured and insurer; rather, their rights and obligations are determined by the insurance policy. See, e.g., St. Paul Fire & Marine Ins. Co. v. A.P.I., 738 N.W.2d 401, 407-08 (Minn.Ct.App. 2007) ("The rights and obligations of the insurer and insured are determined by the insurance policy.... [A]t its inception, the insurer-insured relationship is not fiduciary." (citing Pillsbury Co., 425 N.W.2d at 248-49)). Put simply, Minnesota does not recognize the various tort-based causes of action or damages for insurance bad faith pled in the Amended Complaint. See, e.g., Morris v. Am. Mut. Ins. Co., 386 N.W.2d 233, 237-38 (Minn. 1986) ("Minnesota common law... follows the traditional rule that a bad faith breach of contract does not convert the breach of contract into a tort....").
The two exceptions to this rule are narrow. And, as discussed below, neither exception applies under the facts alleged in the Amended Complaint. First, an insured is entitled to tort damages in the "exceptional case" that the insurer's breach of contract "amounts to an independent tort." Wild, 234 N.W.2d at 790; A.P.I., Inc., 738 N.W.2d at 407 ("To establish extracontractual damages in this breach of contract action, ... A.P.I. must prove the elements of an independent tort before the insurer's assumption of the insured's defense."). The insured must show more than simply "a malicious or bad-faith motive" in breaching the duties imposed in the insurance contract itself, as the breach of contractual duties is not itself tortious, and does not give rise to extra-contractual or punitive damages under Minnesota law. A.P.I., Inc., 738 N.W.2d at 407; see also Morris, 386 N.W.2d at 237; Haagenson v. National Farmers Union Prop. & Cas. Co., 277 N.W.2d 648, 652 (Minn. 1979); Wild, 234 N.W.2d at 789; Minnesota-Iowa Television v. Watonwan T.V. ImprovementAss'n, 294 N.W.2d 297, 309 (Minn. 1980).
In short, absent an allegation (and subsequent proof) of a tort committed by an insurer independent of its duties under the insurance policy, "Minnesota law does not allow an insured to bring a bad faith claim in conjunction with a breach of contract claim." Westfield Ins. Co. v. Robinson Outdoors, Inc., 2010 WL 2399547 *2 (D. Minn., May 24, 2010) (citing A.P.I., 738 N.W.2d at 407-08 and Pillsbury Co., 425 N.W.2d at 248). "Without the independent tort, extra-contractual damages for bad faith simply are not available." Id.
Second, in addition to the "independent tort" exception, Minnesota recognizes a limited action against an insurer for bad faith failure to settle within policy limits, premised on the "fiduciary duty" that arises when an insurer takes control of defense and settlement decisions. But as the APJ. court made clear, such a cause of action arises only where two conditions have been satisfied: (1) the insurer is obligated to assume the insured's defense; and (2) the insurer, in fact, actually assumes that defense and its concomitant duty to reasonably settle the case against its insured. A.P.I., 738 N.W.2d at 407 (citing, for the first proposition, Metro. Prop. & Cas. Ins. Co. v. Miller, 589 N.W.2d 297, 299 (Minn. 1999), and for the second proposition, Short v. Dairyland Ins. Co., 334 N.W.2d 384, 387-88 (Minn. 1983) and Kissoondath v. U.S. Fire Ins. Co., 620 N.W.2d 909, 916 (Minn.App. 2001)). Moreover, an insurer's "fiduciary duty to settle claims in good faith" must be determined on a claim-by-claim basis, and exists only where "there is no dispute as to coverage, liability, policy limits, and the duty to defend." Id.; see Diocese of St. Cloud v. Arrowood Indem. Co., No. 17-CV-2002 (JRT/LIB), 2018 WL 1175421, at *6 (D. Minn. Mar. 6, 2018) (dismissing insured's bad faith failure to settle claims, where insured failed to plausibly allege that insurer undertook defense of the claims and had no good faith basis to dispute coverage); id., 2019 WL 79003, at *4 (D. Minn. Jan. 2, 2019) (denying leave to amend where insured's proposed complaint did not allege that insurer "accepted the duty to defend and settle a specific claim and then later refused in bad faith to fulfill its obligations as to that claim") (emphasis added.)
Importantly, where an insurer undertakes the defense of a case presenting no dispute as to coverage, liability, policy limits, or the duty to defend - giving rise to the fiduciary duty underpinning bad faith failure to settle claims - the insurer's liability for bad faith failure to settle is limited to the insured's adjudicated liability in excess of the policy limits. See, e.g., Lange v. Fidelity & Cas. Co. of New York, 185 N.W.2d 881 (Minn. 1971); see also Strand v. Travelers Ins. Co., 219 N.W.2d 622 (Minn. 1974) ("[T]he proper measure of damages [is] the full amount of the difference between the policy limit and the verdict in the initial action ...."). Stated another way, the excess judgment for which the insured becomes liable constitutes the damages which naturally and proximately flow from the insurer's breach of the duty to settle the claim in good faith within the policy limits.
B. Discussion
Counts II, III, and IV of Amended Complaint, the correlative damages claims at ¶¶ 107. b., c, and d., and Plaintiffs myriad allegations of "bad faith" attempt to assert causes of action that are not recognized under Minnesota law. More specifically, Plaintiff alleges that U.S. Fire acted in bad faith with respect to the settlement of the Adamson Claims (Counts II and III) and the Non-Adamson Claims (Count IV).
As discussed above, Minnesota law generally does not permit tort damages for breach of the duty to defend or indemnify an insured. Plaintiff does not allege facts supporting the "independent tort" exception to this rule. The Amended Complaint is utterly devoid of any allegation of a tort committed by U.S. Fire, independent of its contractual duties under the insurance policies. Thus, as this Court's sister Article III Court similarly concluded in Westfield Insurance Co. v. Robinson Outdoors, Inc.: "to the extent the [Amended Complaint] could be interpreted as [asserting] a bad faith claim, it should be dismissed for failure to state a claim upon which relief could be granted." 2010 WL 2399547, at *2 (D. Minn. May 24, 2010), R&R adopted, 2010 WL 2399382 (D. Minn. June 10, 2010) ("Defendant has neither alleged nor produced prima facie evidence of an independent tort. Without this prerequisite, Defendant will not be able to recover extra-contractual damages for bad faith.").
Nor does Plaintiff plausibly allege facts supporting a bad faith claim on the failure to settle theory. Again, the Amended Complaint alleges breach of a contractual duty to accept alleged reasonable settlements of the Adamson Claims (Count II), and common law bad faith failure to settle both the Adamson Claims (Count III) and the Non-Adamson Claims (Count IV). However, Plaintiff plainly alleges that U.S. Fire never defended the Adamson Claims. (Am. Compl. ¶ 55 ("U.S. Fire has repeatedly denied coverage and refused to defend [the Adamson Claims].").) Minnesota law does not impose a fiduciary duty to reasonably settle claims against an insured where the insurer does not undertake the insured's defense. A.P.I., Inc., 738 N.W.2d at 407 ("[T]he insurer must assume the duty to defend and the concomitant duty to reasonably settle." (emphasis added)). The fact that U.S. Fire did defend the Non-Adamson Claims is irrelevant. "Fiduciary duty... arises on a claim-by-claim basis." Arrowood Indem. Co.,
2019 WL 79003, at *4. In Arrowood, the plaintiff alleged that its insurer accepted coverage for some claims, but wrongfully refused to defend others; this, the Court held, cannot constitute bad faith under Minnesota law. Id. Rather, a claim for bad faith failure to settle arises only if the insurer actually defends a specific claim, and thereafter violates its fiduciary duties with respect to that claim. Id.; see also A.P.I., 738 N.W.2d at 407. Here, the fact that U.S. Fire never agreed to defend the Adamson Claims is fatal to Plaintiffs bad faith allegations in Counts II and III.
Moreover, the fiduciary duty to settle claims in good faith exists only where "there is no dispute as to coverage, liability, policy limits, and the duty to defend." A.P.I., 738 N.W.2d at 407 (emphasis added.) As Plaintiff acknowledges, "[t]he terms, limits, conditions, and existence of several of the Policies have been disputed by U.S. Fire ...." (Am. Compl. ¶ 39.) Plaintiff further avers that this dispute presents "an actual and justiciable controversy between the Trustee and U.S. Fire." (Am. Compl. ¶ 105.) U.S. Fire's good-faith dispute regarding coverage for the Adamson Claims precludes Plaintiffs bad faith failure to settle claims.
Even if U.S. Fire had a fiduciary duty with respect to the Adamson Claims (which is not supported by Minnesota law), Plaintiffs bad faith failure to settle allegations would fail because Plaintiff has not alleged recoverable damages. Minnesota law is clear that the damages for a bad faith failure to settle are limited to the insured's exposure in excess of the policy limits. See Strand, 219 N.W.2d 622 ("[T]he proper measure of damages [is] the full amount of the difference between the policy limit and the verdict in the initial action. . . ."); Trueblood v. MMIC Ins., Inc., No. A21-0452, 2021 WL 5764582, at *4 (Minn.Ct.App. Dec. 6, 2021) (reasoning that because insured "did not make any personal payment toward the settlement," insurer did not breach its duty of good faith). In this case, Plaintiff acknowledges the insured has no such exposure: the Adamson Claimants "covenanted not to execute on the stipulated judgments against the Diocese and to seek recovery on such stipulated judgments only against U.S. Fire." (Am. Compl. ¶59.) Because Plaintiff acknowledges that the Diocese has no exposure excess of the policy limits, Plaintiff cannot assert a bad faith claim for extra-contractual damages with respect to the Adamson Claims. Its remedy, if any, is limited to recovery on the contract.
Finally, regarding Count IV (and its associated claims for relief at ¶¶ 107. c. and d.), any claim for bad faith failure to settle in connection with the Non-Adamson Claims is, as a matter of law, premature. As alleged in the Amended Complaint, the Non-Adamson Claims remain "pending." (Am. Compl. ¶ 50.) There is no allegation that the Diocese has suffered an excess judgment on any of the Non-Adamson Claims. A cause of action for bad faith failure to settle accrues on final entry of a judgment excess of the policy limits, and no sooner. See Amdahl v. Stonewall Ins. Co., 484 N.W.2d 811, 813 (Minn.Ct.App. 1992) (approving the majority rule that "an action against a liability insurer for failure to settle a claim does not accrue... until the judgment against the insured is final," reasoning that "[fjinality of the underlying suit is necessary to establish not only the existence of damages but also the extent"); Larson v. Anchor Cas. Co., 82 N.W.2d 376, 378 (Minn. 1957) ("[TJhere must be bad faith on the part of the insurer with resulting injury to the insured before there can be a cause of action against the insurer for the excess over its undertaking." (emphasis added)).
Plaintiff does not allege that U.S. Fire's conduct in defending the Diocese has resulted in an excess judgment. Unless and until such a judgment is entered, the Diocese has suffered no damages recoverable on a bad faith failure to settle claim, and Plaintiff therefore cannot assert such a claim against U.S. Fire. Count IV is premature; it fails to state a claim upon which relief can be granted; and it should be dismissed.
CONCLUSION
For these reasons, Plaintiffs Amended Complaint raises only non-core matters having no conceivable impact on the Diocese's now-resolved bankruptcy estate and, therefore, the Court lacks subject matter jurisdiction to proceed. Accordingly, this action must be dismissed. In the alternative, Plaintiffs newly-filed Amended Complaint attempts to assert three claims of bad faith against U.S. Fire that, on their face, are not legally cognizable under Minnesota law, and which therefore must be dismissed for failure to state a claim upon which relief can be granted.
CERTIFICATE OF SERVICE
The undersigned certifies that on January 20, 2022, a copy of the foregoing document was filed electronically with the Clerk of Court, using the Court's CM/ECF system, which will send electronic notification of the filing to those parties who have appeared and are registered as CM/ECF participants in this matter. Dated: January 20, 2022 MEAGHER & GEER, PLLP
[DEFENDANT'S PROPOSED] ORDER ON DEFENDANT'S MOTION TO DISMISS THE AMENDED COMPLAINT
This matter is before the Court on the Motion to Dismiss filed by Defendant U.S. Fire Insurance Company. Based on the submissions and the entire file and proceedings herein, IT IS HEREBY ORDERED that Defendant's Motion to Dismiss is GRANTED, and Plaintiffs Amended Complaint [Doc. No. 97] is DISMISSED WITHOUT PREJUDICE. IT IS SO ORDERED.