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Signature Development, LLC; Jeff Lage; and v. Mid-Continent Casualty Company

September 18, 2012

SIGNATURE DEVELOPMENT, LLC; JEFF LAGE; AND JENNIFER LANDGUTH, PLAINTIFFS,
v.
MID-CONTINENT CASUALTY COMPANY, DEFENDANT.



The opinion of the court was delivered by: Veronica L. Duffy United States Magistrate Judge

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION TO COMPEL [DOCKET NO. 22]

INTRODUCTION

This matter is before the court on a complaint by plaintiffs Signature Development, LLC, Jeff Lage, and Jennifer Landguth (collectively "Signature"), against Mid-Continent Casualty Company ("Mid-Continent"), alleging breach of contract, bad faith, breach of fiduciary duty, unfair trade practices, intentional infliction of emotional distress, and vexatious refusal to pay. See Docket No. 1. Jurisdiction is premised on the diverse citizenship of the parties and an amount in controversy in excess of $75,000. See 28 U.S.C. § 1332.

Pending is plaintiffs' motion to compel Mid-Continent to produce certain discovery which plaintiffs requested. See Docket No. 22. The district court, the Honorable Jeffrey L. Viken, referred this motion to this magistrate judge for resolution pursuant to 28 U.S.C. § 636(b)(1)(A). See Docket No. 32.

FACTS

The facts pertinent to the motion pending before this court are as follows.*fn1 Signature is a company engaged in the business of developing property. Jeff Lage and Jennifer Landguth are both members of Signature. Signature's lawsuit against Mid-Continent stems from three separate lawsuits filed against Signature and other defendants. These actions include: Carlson v. Oxner Construction, et al.; Kerr v. Timberman, et al.; and Klosterman v. Dakota Castles, Inc., et al. See Docket No. 1. Signature also asserts that a separate lawsuit, Perry v. Timberman, et al. which does not form part of its claims in this matter is also relevant to the current motion. Before discussing the various requests made by Signature in its motion to compel, the court will discuss the various facts pertaining to each lawsuit as they relate to the motion to compel now before the court.

A. The Carlson Action

Mid-Continent issued a policy of insurance to Signature with an initial period of August 22, 2003, to August 22, 2004. The policy was renewed in one year increments through August 22, 2007. On April 20, 2007, Scott and Caryn Carlson filed an action in South Dakota state court in the Seventh Judicial Circuit Court against Signature and other defendants. The action asserted claims against Signature in relation to a home the Carlsons hired the defendants to build, alleging negligent misrepresentation and breach of contract, seeking rescission and assorted damages from Signature. The Carlsons alleged, in part, that they suffered damages to their home when the basement floor began rising and cracking as a result of water expanding the soil beneath the Carlsons' home from 2004.

Oxner Construction ("Oxner"), and other defendants in the Carlson action, also alleged cross-claims against Signature alleging that the Carlsons' injuries or damages were brought about by the action or inaction of Signature. Oxner also alleged cross-claims against Signature alleging that if Oxner was negligent, there was a disproportion of fault between Oxner and Signature. Oxner sought contribution and indemnification from Signature based on the Carlsons' allegations against Oxner. Mid-Continent was aware of the cross-claims.

By letter dated May 22, 2007, Mid-Continent accepted the defense of the Carlson case of behalf of Signature, stating: "After review of the complaint, Mid-Continent Casualty Company has determined that there are allegations that may be covered by the policy. Therefore, we are electing to accept the defense of Signature Development, LLC under a full reservation of all rights available at law and/or stipulated to by the terms, conditions and provisions of the subject policy." *fn2 See Docket No. 24-6 at 1. Mid-Continent then hired the Costello Porter law firm to defend Signature in the Carlson action.

The Costello Porter law firm provided a defense to the Carlsons' claims thereafter until October 21, 2009, when it informed Signature by letter that: "After further review of the allegations within Plaintiff's Complaint and the general liability policy, we determined that the alleged damages are not 'Property Damage' resulting from an 'Occurrence' and are excluded by policy exclusions. Therefore, Mid-Continent Casualty company will no longer provide a defense to Signature Development, LLC effective November 23, 2009." *fn3 See Docket No. 24-7 at 1. Mid-Continent further explained:

When examining the claim at hand and the damages alleged, Mid-Continent Casualty Company must conclude that the alleged damages do not result in "Property Damage" or "Bodily Injury" as a result of an "Occurrence". Additionally, as previously noted, the policy precludes coverage for work that is impaired, deficient, incomplete, inadequate, defective or otherwise in need of repair or replacement, as indicated in exclusions j.(5), j.(6), m. and n. The policy excludes expected or intended injury under exclusion a., contractual liability under exclusion b., pollution damages under exclusion f. (2) and damage to your product under exclusion k.

As a consequence, Mid-Continent Casualty Company will cease to defend Signature Development Company L.L.C. on November 23, 2009.

Id. at 5 (emphasis in original).

After receiving this letter, Signature sent Mid-Continent a response letter dated November 5, 2009, informing Mid-Continent that it could not simply end defense coverage during the middle of the pending case after agreeing to provide for the defense as Mid-Continent had done in October of 2009.*fn4 See Docket No. 24-8. Signature also asserted in the letter that Mid-Continent had no legal basis to end the defense coverage. Id. Despite Signature's letters, Mid-Continent still chose to terminate the insurance coverage benefits to Signature, a fact it informed Signature of by letter dated November 16, 2009.

Following Mid-Continent's withdrawal from defending Signature, Signature began a declaratory judgment action against Mid-Continent. Signature asked the court to declare that Mid-Continent had a duty to defend Signature under the terms of the insurance policy Mid-Continent had issued to Signature.

As a result of Mid-Continent terminating Signature's insurance benefits, Signature asserts that it incurred attorney's fees and costs to defend the Carlsons' claims and Oxner's cross-claim, and to institute the declaratory judgment action against Mid-Continent. Mid-Continent ultimately paid compensatory damages to the Carlsons for the claims associated with their complaint.

On February 3, 2011, Signature offered to dismiss the declaratory judgment action against Mid-Continent if Mid-Continent would pay for the attorneys' fees and expenses that Signature incurred to defend the Carlson lawsuit after Mid-Continent ceased defending Signature. See Docket No. 24-9. On February 7, 2011, Mid-Continent accepted the offer and agreed to pay for the attorneys' fees and costs Signature incurred on the condition that the declaratory judgment action be dismissed as a contested case settlement without admission of fault by any party. See Docket No. 24-10.

However, when Mid-Continent proffered the written version of the parties' settlement agreement and release, a new term was inserted that had not been discussed via e-mail by the parties. In the written draft of the settlement agreement, Mid-Continent purported to require that Signature release and forever discharge Mid-Continent from any and all claims, actions, liabilities, causes of action, complaints, demands, and/or damages of any type including but not limited to compensatory, punitive, or exemplary damages, costs, attorneys' fees, emotional distress, loss of income, interest, expenses, taxes and any other compensation allegedly arising out of any breach of contract, bad faith claim handling or processing, and/or vexatious conduct by Mid-Continent.

See Docket No. 24-11.

Signature asserts that the above requirement that would have required Signature to waive any bad faith claims is, in and of itself, bad faith and prohibited by South Dakota case law and statute.*fn5 Signature refused to enter into the proffered written agreement and Mid-Continent never paid the attorneys' fees and expenses Signature incurred in the Carlson action. Signature brought this lawsuit against Mid-Continent in part due to Mid-Continent withdrawing its defense in the Carlson action and then attempting to condition settlement on Signature waiving its bad faith claim.

B. The Kerr Action

On May 10, 2007, Mark and Sande Kerr brought a lawsuit against several parties including Signature. The Kerrs alleged claims against the defendants including breach of contract, constructive fraud, actual fraud, and negligent misrepresentation. The Kerrs' complaint stemmed from their claim that the defendants failed to take into account and to construct for the existing soil conditions. Signature tendered the defense of this claim to Mid-Continent on or about May, 23, 2007, which was the day after Mid-Continent issued its letter accepting the defense of the Carlsons' claims.

On June 22, 2007, Mid-Continent issued a letter to Signature refusing to defend or indemnify Signature for the reason that the Kerrs' lot was sold prior to the retroactive date of the insurance policy. However, Signature asserts that the Kerrs' allegations against Signature constituted continuing torts which occurred when Mid-Continent's policy was in effect. Signature asserts they have now incurred attorneys' fees, costs, and damages to defend and settle the Kerrs' claims.

C. The Klosterman Action

On May 10, 2007, Jeff and Sheila Klosterman brought a lawsuit against several parties including Signature. The Klostermans alleged claims against defendants including breach of contract, constructive fraud, actual fraud, and negligent misrepresentation. The Klostermans' complaint stemmed from their claim that defendants failed to take into account and to construct for the existing soil conditions. Signature tendered the defense of this claim to Mid-Continent shortly after the suit was filed.

On June 19, 2007, Mid-Continent issued a letter to Signature refusing to defend or indemnify Signature. Signature asserts that the Klostermans' allegations constituted a continuing tort which occurred when Mid-Continent's policy was in effect. Signature asserts that it has incurred attorneys' fees, costs, and damages to defend and settle the Klostermans' claims.

D. The Perry Action*fn6

On July 31, 2009, Robert and Amy Perry brought a lawsuit against several parties including Signature. The Perrys alleged claims against the defendants including breach of contract, constructive fraud, actual fraud, and negligent misrepresentation. The Perrys' complaint stemmed from their claim that the defendants failed to take into account and to construct for the existing soil conditions. Signature tendered the defense of this claim to Mid-Continent.

On October 1, 2009, Mid-Continent issued a letter to Signature refusing to defend or indemnify Signature. Signature asserts that the Perrys' allegations against Signature constituted continuing torts which occurred when MidContinent's policy was in effect. Signature asserts they have now incurred attorneys' fees, costs, and damages to defend and settle the Perrys' claims.

Signature brought this current lawsuit against Mid-Continent asserting that Mid-Continent breached its duty to defend Signature in the Kerr and Klosterman lawsuits. Signature also asserts that Mid-Continent acted in bad faith by conditioning payment of the attorneys' fees and expenses, incurred by Signature after Mid-Continent withdrew its defense in the Carlson action, upon a release of any bad faith claim that Signature may have with respect to MidContinent's handling of that claim.

E. Procedural History

Signature served its Second Set of Requests for Production of Documents on Mid-Continent on February 2, 2012. On March 6, 2012, Signature served its Third Set of Requests for Production of Documents on Mid-Continent. On April 25, 2012, counsel for Signature sent a letter to Mid-Continent asking for discovery responses by May 1, 2012. On April 30, 2012, Mid-Continent served its responses to both sets of discovery requests. See Docket Nos. 24-1, 24-2. Mid-Continent did not provide any documents in response to these discovery requests.

On May 17, 2012, counsel for both parties met with the understanding that Mid-Continent was going to have documents to disclose. At that meeting, Mid-Continent produced only the company's annual reports. The parties then agreed that Mid-Continent could have until May 29, 2012, to produce additional documents. See Docket No. 24-3. On May 29, 2012, Mid-Continent provided its First Supplemental Responses to Signature's Second Set of Requests for Production of Documents. See Docket No. 24-4. In that production, Mid-Continent provided documents responsive to Signature's requests for company goals and incentive plans (Req. Nos. 7 & 9) and training materials (Req. No. 13).

On June 7, 2012, Mid-Continent provided its Second Supplemental Responses to Signature's Second Set of Requests for Production of Documents. See Docket No. 24-5. Mid-Continent provided additional documents regarding company goals and incentives (Req. Nos. 7 & 9) and documents regarding searching information on its databases (Req. No. 26). Mid-Continent also provided a privilege log identifying some of the documents it has refused to produce to Signature. Id.

Thereafter, Signature filed its motion to compel with this court on June 26, 2012. The instant motion concerns 14 separate document requests that Signature served on Mid-Continent that Mid-Continent either refused to produce documents on, or have limited their production of documents as to.

DISCUSSION

A. Meet and Confer Requirement

Both the Federal Rules of Civil Procedure and this district's local rules of procedure require that parties meet and confer in an attempt to resolve discovery disputes before filing discovery motions. See Fed. R. Civ. P. 37(a)(1); DSD LR 37.1. A certification must be part of any discovery motion and the certification must show that a good-faith effort was made to resolve disputes before filing the motion. Id. Signature's counsel asserts that it has complied with both the Federal and local rules requiring the parties to try to work out discovery differences between themselves prior to filing a motion to compel. See Docket No. 22. Mid-Continent does not disagree. Therefore, the court finds that Signature has satisfied the meet-and-confer prerequisite to filing the instant discovery motion.

B. Scope of Discovery in a Civil Case

The scope of discovery is governed by Fed. R. Civ. P. 26. The scope described by that rule is as follows:

Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any non-privileged matter that is relevant to any party's claim or defense--including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule 26(b)(2)(C).

See Fed. R. Civ. P. 26(b)(1).

This scope of discovery under subsection (b)(1) is limited by subsection (b)(2)(C). That subsection provides that:

On motion or on its own, the court must limit the frequency or extent of discovery otherwise allowed by these rules or by local rule if it determines that:

(i) the discovery sought is unreasonably cumulative or duplicative, or can be obtained from some other source that is more convenient, less burdensome, or less expensive;

(ii) the party seeking discovery has had ample opportunity to obtain the information by discovery in the action; or

(iii) the burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties' resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.

See Fed. R. Civ. P. 26(b)(2)(C).

The scope of discovery under Rule 26(b) is extremely broad. See 8 Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 2007 (2d ed. 1994) (hereinafter "Wright & Miller"). The reason for the broad scope of discovery is that "[m]utual knowledge of all the relevant facts gathered by both parties is essential to proper litigation. To that end, either party may compel the other to disgorge whatever facts he has in his possession." 8 Wright & Miller, § 2007, 96 (quoting Hickman v. Taylor, 329 U.S. 495, 507-08, 67 S. Ct. 385, 392, 91 L. Ed. 2d 451 (1947)). The Federal Rules distinguish between discoverability and admissibility of evidence. Id. at 95; see also Fed. R. Civ. P. 26(b), 32, and 33. Therefore, the rules of evidence assume the task of keeping out incompetent, unreliable, or prejudicial evidence at trial. These considerations are not inherent barriers to discovery, however.

The advisory committee's note to the 2000 amendments to Rule 26(b)(1) provide guidance on how courts should define the scope of discovery in a particular case:

Under the amended provisions, if there is an objection that discovery goes beyond material relevant to the parties' claims or defenses, the court would become involved to determine whether the discovery is relevant to the claims or defenses and, if not, whether good cause exists for authorizing it so long as it is relevant to the subject matter of the action. The good-cause standard warranting broader discovery is meant to be flexible.

The Committee intends that the parties and the court focus on the actual claims and defenses involved in the action. The dividing line between information relevant to the claims and defenses and that relevant only to the subject matter of the action cannot be defined with precision. A variety of types of information not directly pertinent to the incident in suit could be relevant to the claims or defenses raised in a given action. For example, other incidents of the same type, or involving the same product, could be properly discoverable under the revised standard. ... In each case, the determination whether such information is discoverable because it is relevant to the claims or defenses depends on the circumstances of the pending action.

The rule change signals to the court that it has the authority to confine discovery to the claims and defenses asserted in the pleadings, and signals to the parties that they have no entitlement to discovery to develop new claims or defenses that are not already identified in the pleadings. ... When judicial intervention is invoked, the actual scope of discovery should be determined according to the reasonable needs of the action. The court may permit broader discovery in a particular case depending on the circumstances of the case, the nature of the claims and defenses, and the scope of the discovery requested.

See Fed. R. Civ. P. 26(b)(1) advisory committee's note.

The same advisory committee's note further clarifies that information is discoverable only if it is relevant to the claims or defenses of the case or, upon a showing of good cause, to the subject matter of the case. Id. "Relevancy is to be broadly construed for discovery issues and is not limited to the precise issues set out in the pleadings. Relevancy ... encompass[es] 'any matter that could bear on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case.' " E.E.O.C. v. Woodmen of the World Life Ins. Society, 2007 WL 1217919 at *1 (D. Neb. March 15, 2007) (quoting Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978)). The party seeking discovery must make a "threshold showing of relevance before production of information, which does not reasonably bear on the issues in the case, is required." Id. (citing Hofer v. Mack Trucks, Inc., 981 F.2d 377, 380 (8th Cir. 1993)). "Mere speculation that information might be useful will not suffice; litigants seeking to compel discovery must describe with a reasonable degree of specificity, the information they hope to obtain and its importance to their case." Id. (citing Cervantes v. Time, Inc., 464 F.2d 986, 994 (8th Cir. 1972)).

Discoverable information itself need not be admissible at trial; rather, "discovery of such material is permitted if reasonably calculated to lead to the discovery of admissible evidence." See Fed. R. Civ. P. 26(b)(1) advisory committee's note.

Once the requesting party has made a threshold showing of relevance, the burden shifts to the party resisting discovery to show specific facts demonstrating that the discovery is not relevant, or how it is overly broad, burdensome, or oppressive. Penford Corp. v. National Union Fire Ins. Co., 265 F.R.D. 430, 433 (N.D. Iowa 2009); St. Paul Reinsurance Co. v. Commercial Financial Corp., 198 F.R.D. 508, 511 (N.D. Iowa 2000). The articulation of mere conclusory objections that something is "overly broad, burdensome, or oppressive," is insufficient to carry the resisting party's burden--that party must make a specific showing of reasons why the relevant discovery should not be had. Cincinnati Ins. Co. v. Fine Home Managers, Inc., 2010 WL 2990118, *1 (E.D. Mo. 2010); Burns v. Imagine Films Entertainment, Inc., 164 F.R.D. 589, 593 (W.D.N.Y. 1996).

The plaintiffs' claims in this lawsuit are bad faith, breach of contract -- duty to defend, breach of fiduciary duty, unfair trade practices, intentional infliction of emotion distress, and vexatious refusal to pay insurance benefits. Signature requests both compensatory and punitive damages on its claims.

To prove a bad faith cause of action, plaintiffs must show that Mid-Continent had no reasonable basis for denying policy benefits, and that it acted with knowledge or a reckless disregard as to the lack of a reasonable basis for the denial of policy benefits. See Sawyer v. Farm Bureau Mut. Ins. Co., 2000 S.D. 144, ¶ 18, 619 N.W.2d 644, 649.

Plaintiffs also assert a claim of breach of contract based on MidContinent's duty to defend Signature. In South Dakota, the duty to defend an insured " 'is much broader than the duty to pay a judgment rendered against the insured.' " Cincinnati Ins. Co. v. Pro Enter., Inc., 394 F. Supp. 2d 1127, 1131 (D.S.D. 2005) (quoting Biegler v. Am. Family Mut. Ins. Co., 2001 S.D. 13, ¶ 20, 621 N.W.2d 592, 599). "The insurer has the burden of proof on the duty to defend issue. 'To satisfy this burden the insurer must show that the claim clearly falls outside of the policy coverage.' " Id. (emphasis in original). "In addition, if the complaint against the insured contains one claim that falls within the policy coverage, the duty to defend arises even though the pleadings are ambiguous or reveal other claims not covered by the policy, and notwithstanding that extraneous facts indicate the claim is false, groundless or even fraudulent." Id. (citations omitted).

Plaintiffs also assert a claim for breach of fiduciary duty. "In a third party coverage situation, the relationship of an insurer to its insured is like that of a fiduciary because the insurer must give as much consideration to its insured's interests as it does its own." Bertelsen v. Allstate Ins. Co., 2011 S.D. 13, ¶ 47, 796 N.W.2d 685, 700. A "fiduciary has the duty to act primarily for the benefit of the other." Giebink v. Giegink, 2009 WL 1350805, *4 (D.S.D. 2009). To recover for breach of fiduciary duty, the plaintiffs must prove that "(1) defendant breached [its] fiduciary duty, which required [it] to act for the benefit and in the best interest of the plaintiff in the course of the fiduciary relationship and (2) the breach of the fiduciary duty proximately caused damage." Fed. Beef Processors, Inc. v. Royal Indem. Co., 2008 WL 4560617, *9 (D.S.D. 2008) (citing SD Civil PJI 160-03).

Plaintiffs premise their claim of unfair trade practices on SDCL chapter 58-33. Section 5 of Chapter 58-33 prohibits the making of a misrepresentation as to the provisions of, or benefits available under, an insurance policy. See SDCL § 58-33-5. In section 67 of that chapter, unfair or deceptive insurance company practices are defined to include failing to make a payment of benefits that is reasonably clearly required under the policy in order to obtain a settlement of benefits due under other portions of the policy. See SDCL § 58-33-67(4). Chapter 58-33 provides a private right of action for damages for any insured claiming to have been injured by an insurance company's unfair insurance practice. See SDCL § 58-33-46.1. Claimants suing under this provision are entitled to an award of reasonable attorney's fees if successful.

Id.

Plaintiffs also assert a claim of intentional infliction of emotional distress ("IIED"). The tort of IIED is a common law claim governed by South Dakota state law. A plaintiff asserting an IIED claim must show four elements: "(1) an act by the defendant amounting to extreme and outrageous conduct; (2) intent on the part of the defendant to cause the plaintiff severe emotional distress; (3) the defendant's conduct was the cause in-fact of plaintiff's distress; and (4) the plaintiff suffered an extreme disabling emotional response to defendant's conduct." Fix v. First State Bank of Roscoe, 2011 S.D. 80, ¶ 19, 807 N.W.2d 612, 618 (quoting Anderson v. First Century Fed. Credit Union, 2007 S.D. 65, ¶ 38, 738 N.W.2d 40, 51-52). As to element number two, liability may also ensue for reckless conduct on the part of the defendant, as opposed to intentional conduct. Petersen v. Sioux Valley Hosp. Ass'n., (Petersen II), 491 N.W.2d 467, 469 (S.D. 1992); Wangen v. Knudson, 428 N.W.2d 242 (S.D. 1988).

The plaintiffs premise their claim for vexatious refusal to pay insurance benefits on SDCL chapter 58-12. Under section 3 of Chapter 58-12, an insured may recover the costs of its attorney fees in an action against an insurer who "has refused to pay the full amount of such loss, and that such refusal is vexatious or without reasonable cause." The court must determine three issues before it can award attorney fees. "First, whether the insurance company refused to pay the full amount of a loss. Second, whether the refusal was vexatious or without reasonable cause. And third, what is a reasonable charge for the work performed to enforce the insurance contract claim, vis-avis any other claims jointly brought." Tripp v. Western Nat. Mut. Ins. Co., 2010 WL 4791819, *1; Civ. No. 09-4023, Docket No. 105, at page 3 (D.S.D. Nov. 17, 2010) (citing Biegler, 2001 S.D. at ¶ 56, 621 N.W.2d at 606).

Plaintiffs have also included a request for punitive damages. To be entitled to an award of punitive damages, plaintiffs must show that Mid-Continent acted with malice, actual or implied. See Bertelsen, 2011 S.D. at ¶ 39, 796 N.W.2d at 698-99 (citing SDCL § 21-3-2). "Actual malice is a positive state of mind, evidenced by a positive desire and intention to injure one another, actuated by hatred or ill-will towards that person." Id. at 699 (quoting Biegler, 2001 S.D. at ¶ 45, 621 N.W.2d at 605). "By contrast, presumed malice is 'malice which the law infers from or imputes to certain acts.' " Id. (quoting Harter v. Plains Ins. Co., 1998 S.D. 59, ¶ 36, 579 N.W.2d 625, 634). "Presumed malice may not ...


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