Removal and Remand: Equitable Garnishments to Stay in State Court
Insurance carriers will often do everything within their power to gain federal jurisdiction over coverage and extra-contractual lawsuits.
This can take several forms including the preemptive filing of a declaratory judgment action in federal court involving a question of coverage prior to the underlying liability suit being resolved or through the removal of equitable garnishment suits when an injured party is seeking to recover compensation for their judgment against an insured.
Under federal abstention principals, a federal court will often stay or dismiss a federal declaratory judgment action if there is a parallel or substantially similar state lawsuit in which the same issues are being litigated. When an equitable garnishment lawsuit has been removed to federal court, the federal courts have been consistent in remanding such cases back to state court.
The Eastern District of Missouri recently had the opportunity to continue this long-standing practice.
Otten v. Liberty Mutual Ins. Co., 2018 WL 3861340 (August 14, 2018)
Background Leading to Removal
The claims in Otten arose as a result of the injuries and ultimately the death of Vincent Otten based on his exposure to asbestos.
Crescent Plumbing Supply Company was named as a defendant in the underlying liability lawsuit and was insured under policies initially issued by Liberty Mutual. After notification of the Otten lawsuit, Liberty Mutual informed Crescent that it would defend the suit but was reserving its right to deny coverage.
After being informed of Liberty Mutual’ s position, Crescent and the Otten’s entered into a §537.065 agreement in which execution of any judgment would be limited to the insurance proceeds of Crescent’s insurance carriers. Crescent also assigned its rights to pursue any claim for bad faith, but the parties agreed that Crescent would retain 15% of any settlement, judgment, or monies obtained based on the resolution of those claims.
After judgment was entered by the Court, the Ottens filed a lawsuit seeking to collect and enforce their judgment. As one of their claims, the Ottens set out a claim for equitable garnishment under §379.200 and named Crescent as a defendant as required by statute.
Removal and Remand
Liberty Mutual removed the Otten’s lawsuit to federal court alleging complete diversity of the parties and that the amount in controversy exceed $75,000.
While there was no dispute that the amount in controversy exceeded the threshold amount, the alignment of the parties did not result in complete diversity as the Ottens are citizens of Missouri and Crescent was a Missouri corporation with its principal place of business in Missouri.
Recognizing this, Liberty Mutual raised several arguments why the Court, despite the lack of complete diversity on the face of the Petition, had jurisdiction. In part, these arguments focused on Crescent retaining a 15% interest in the recovery of any bad faith claim against its insurers. This, Liberty argued, required Crescent to be realigned as a plaintiff or required Crescent to be deemed a nominal party whose citizenship should be ignored for diversity purposes.
Relying on the equitable garnishment statute, the Court shot down both these arguments.
The Court noted the equitable garnishment statute required the insured to be made a party and case law has consistently held that the insured was properly joined as a party in an equitable garnishment suit. Based on this, the Court refused to realign Crescent as a plaintiff and refused to deem Crescent as a nominal party. In addition, the Court noted that Crescent retaining 15% of any recovery for bad faith had no impact on the prior equitable garnishment decisions dealing with realignment, removal and remand. The Otten’s were entitled to bring an equitable garnishment regardless of Crescent retaining any bad faith recovery rights and Crescent retaining 15% of any bad faith recovery did not make these prior cases distinguishable.
Finally, the Court upheld a line of cases finding that even if Crescent was realigned as a plaintiff, Liberty Mutual would still be deemed a citizen of Missouri based on the ‘direct action’ provisions of 28 U.S.C. §1332(c)(1). This section mandates that in direct actions against an insurer in which the insured is not a defendant, the insurer is deemed a citizen of any state in which the insured is a citizen. As an equitable garnishment is considered a direct action against an insurer, complete diversity would not be present if Crescent was realigned as a plaintiff as Liberty Mutual would assume Crescent’s Missouri citizenship.
At its core, Otten upholds Missouri Federal District court precedent holding that actions involving equitable garnishments, in which the insured and plaintiff are Missouri citizens, are not subject to diversity jurisdiction. Otten also seems to eliminate any argument that can and has been made that only a partial assignment of any bad faith claim alters the relationship of the parties to such an extent that jurisdiction should be conferred on federal courts in actions for equitable garnishment.