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Zebrowski v. American Standard Insurance Company of Wisconsin

United States District Court, D. South Dakota, Western Division

September 21, 2017




         Plaintiff Greg Zebrowski initiated this action against defendant American Standard Insurance Company of Wisconsin. (Docket 1). Plaintiff's complaint advances four counts: breach of contract, bad faith, attorney's fees and punitive damages. Id. at pp. 3-5. Defendant filed an answer. (Docket 6, later amended at Docket 23). Defendant moves to dismiss each count of plaintiff's complaint. (Docket 11). The court has jurisdiction. 28 U.S.C. § 1332; (Docket 1 at p. 1).


         In October 2011, Travis Neal was intoxicated while driving his car and he rear-ended plaintiff's car. (Docket 1 at p. 1). Plaintiff suffered serious injuries. Id. at pp. 1-2. When this car accident occurred, defendant was providing plaintiff with underinsured motorist coverage. Id. at p. 2. The insurance contract covered plaintiff's initial medical payments. Id. Plaintiff settled with Mr. Neal's insurance provider, SAFECO Insurance Companies, for $90, 000 in December 2013. Id.

         By February 2014, plaintiff requested his policy limit of $150, 000 from defendant. Id. Defendant denied the request in May 2014. Id. That month plaintiff filed suit in South Dakota state court. Id.; (Docket 13-1). Plaintiff's state court complaint consisted of one count: underinsured motorist coverage. (Docket 13-1 at p. 4). Before trial commenced, “the parties stipulated that the underinsured motorist coverage policy limits applicable to [the] case [were] $250, 000 and the liability limits from Travis Neal's insurer [were] the amount of $100, 000[, which] must be subtracted from the underinsured motorist coverage policy limits.” (Docket 13-4 at p. 2). Based on that agreement, “any verdict in excess of $250, 000 would result in the Court having to enter a judgment in the amount of $150, 000.” Id.

         In September 2015, a jury found for plaintiff and awarded him $400, 000 plus $14, 327 in interest for his injuries and damages. (Docket 1 at p. 3). The state court judge entered a judgment in the amount of $154, 099.83, reflecting the parties' stipulation plus interest. (Docket 13-4 at pp. 2-3). Defendant satisfied the judgment on October 12, 2015. (Docket 13-5).

         Plaintiff then filed this action, claiming:

Defendant . . . engaged in a deliberate pattern and practice of ignoring and undervaluing Plaintiff's claim under its policy of insurance in order to decrease the amount of claim expenses it must pay to its insured. . . .
Defendant unreasonably and fraudulently elevated its own interests above those of Plaintiff, did not promptly or in good faith pay the claim of its insured, and refused to settle in good faith, forcing Plaintiff to sue for the benefit to which he was entitled under his insurance contract. . . .
Defendant deliberately handled Plaintiff's claim in a manner designed to force its insured to capitulate to a low settlement offer or commence litigation, which Defendant knows is expensive and stressful, and which invariably delays and dilutes payment of benefits that Defendant knows are owed and to which its insured was entitled.

(Docket 1 at p. 3). Defendant denies these allegations and moves to dismiss the complaint. (Dockets 23 at p. 3 & 11).


         “It is, of course, well-settled that in a suit based on diversity of citizenship jurisdiction the federal courts apply federal law as to matters of procedure but the substantive law of the relevant state.” In re Baycol Prods. Litig., 616 F.3d 778, 785 (8th Cir. 2010) (internal quotation marks omitted). Defendant provides several grounds for dismissing the counts in plaintiff's complaint. (Docket 11). Applying South Dakota law to substantive issues, the court addresses each parties' arguments count-by-count.


         In support of his breach of contract claim, plaintiff asserts:

Defendant was informed of the October 6, 2011, collision resulting in injury to Plaintiff, and Plaintiff advised Defendant of his claim for underinsured motorist benefits under his policy of insurance, and otherwise fully cooperated with defendant in connection with the claim. . . .
Defendant failed its duty under the contract of insurance to fairly and adequately evaluate the claim and pay the full amount of damages owed its insured, and refused to offer a reasonable and good faith settlement, all in breach of its contract of insurance with Plaintiff.

(Docket 1 at p. 3).

         Defendant presents two bases for dismissing this cause of action: it is barred by (1) South Dakota statute and (2) issue preclusion. (Docket 11 at p. 2).

         A. SDCL § 58-11-9.5

         First, defendant argues SDCL § 58-11-9.5 prohibits plaintiff's breach of contract claim. (Docket 12 at pp. 9-10). That statute provides:

Subject to the terms and conditions of such underinsured motorist coverage, the insurance company agrees to pay its own insured for uncompensated damages as its insured may recover on account of bodily injury or death arising out of an automobile accident because the judgment recovered against the owner of the other vehicle exceeds the policy limits thereon. Coverage shall be limited to the underinsured motorist coverage limits on the vehicle of the party recovering less the amount paid by the liability insurer of the party recovered against.

SDCL § 58-11-9.5. Because defendant satisfied the judgment from the state case, it contends plaintiff seeks double recovery, which is inconsistent with the statute. (Docket 12 at pp. 9-10).

         In response, plaintiff argues defendant incorrectly characterizes its cause of action. (Docket 17 at pp. 5-7). Plaintiff relies on Garrett v. BankWest, Inc., the South Dakota Supreme Court case establishing the following principle: “Every contract contains an implied covenant of good faith and fair dealing which prohibits either contracting party from preventing or injuring the other party's right to receive the agreed benefits of the contract.” 459 N.W.2d 833, 841 (S.D. 1990). The Garrett Court held this principle “allows an aggrieved party to sue for breach of contract when the other contracting party, by his lack of good faith, limited or completely prevented the aggrieved party from receiving the expected benefits of the bargain. A breach of contract claim is allowed even though the conduct failed to violate any of the express terms of the contract agreed to by the parties.” Id.

         Plaintiff goes on to argue his complaint articulates a breach of contract claim as Garrett contemplates. (Docket 17 at pp. 6-7). According to defendant, there are many problems with plaintiff's breach of contract claim even if it is understood as relating to an implied covenant of good faith and fair dealing. (Docket 21 at pp. 6-12).

         Even if the court finds plaintiff properly articulates a breach of contract claim consistent with SDCL § 58-11-9.5, defendant's second argument-issue preclusion-requires dismissal of the cause of action.


         “The law of the forum that rendered the first judgment controls the res judicata analysis.” Schaefer v. Putnam, 827 F.3d 766, 769 (8th Cir. 2016). When resolving a motion to dismiss based on res judicata, the court “accept[s] the non-moving party's factual allegations as true and construe[s] all reasonable inferences in favor of the nonmovant.” Id. “Res judicata consists of two preclusion concepts: issue preclusion and claim preclusion.” Estate of Johnson by & through Johnson v. Weber, 898 N.W.2d 718, 733 (S.D. 2017). “Issue preclusion refers to the effect of a judgment in foreclosing relitigation of a matter that has been litigated and decided, and also is referred to as direct or collateral estoppel.” Id. (internal quotation marks omitted). In contrast, claim preclusion has a broader effect because it “prevents the relitigation of a claim or issue that was ‘actually litigated or which could have been properly raised.' ” Dakota, Minn. & E. R.R. Corp. v. Acuity, 720 N.W.2d 655, 660 (S.D. 2006) (emphasis added) (quoting Nelson v. Hawkeye Sec. Ins. Co., 369 N.W.2d 379, 381 (S.D. 1985)). “The doctrine of res judicata is premised on two maxims: [a person] should not be twice vexed for the same cause and it is for the public good that there be an end to litigation. Res judicata seeks to promote judicial efficiency by preventing repetitive litigation over the same dispute.” People ex rel. L.S., 721 N.W.2d 83, 90 (S.D. 2006) (internal citations and quotation marks omitted).

         “The collateral estoppel doctrine ‘bar[s] relitigation of an essential fact or issue involved in the earlier suit' if a four-part test is satisfied: ‘(1) Was the issue decided in the prior adjudication identical with the one presented in the action in question? (2) Was there a final judgment on the merits? (3) Was the party against whom the plea is asserted a party or in privity with a party to the prior adjudication? (4) Did the party against whom the plea is asserted have a full and fair opportunity to litigate the issue in the prior adjudication?' ” Hamilton v. Sommers, 855 N.W.2d 855, 866 (S.D. 2014) (quoting Estes v. Millea, 464 N.W.2d 616, 618 (S.D. 1990)).

         “In examining whether these elements are present, a court should construe the doctrine liberally, unrestricted by technicalities. However, because the doctrine bars any subsequent litigation, it should not be used to defeat the ends of justice. Instead, courts ‘must give careful consideration to the case at hand before erecting the doctrine's preclusive bar.' ” L.S., 721 N.W.2d at 90 (quoting Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 401 (1981)).

         i. SAME ISSUE

         “In the first step, [the court] must make a ‘determination of the precise issues' litigated and decided in the state proceeding [ ] and the issues raised in the present case.”[1] SDDS, Inc. v. State of S.D., 994 F.2d 486, 493 (8th Cir. 1993) (quoting Melbourn v. Benham, 292 N.W.2d 335, 338 (S.D. 1980)).

         In arguing this element of issue preclusion, defendant asserts that when “determining whether two separate suits involve the same claim or cause of action, South Dakota courts apply Restatement (Second) Judgments, § 24, which is often referred to as the ‘transaction test.' ” (Docket 12 at p. 12). This statement is not true. Whether a state applies the transaction test set forth in the Restatement is a significant point, and when courts discuss or adopt the test, they often provide thorough reasoning. See, e.g., Villareal v. United Fire & Casualty Co., 873 N.W.2d 714, 719-25 (Iowa 2016) (extensively discussing the transaction test).

         As noted above, South Dakota law applies to issue preclusion in this case. See Schaefer, 827 F.3d at 769. To support defendant's argument about the transaction test, it cites four cases: one case from the United States Court of Appeals for the Eighth Circuit, two from the United States District Court for the District of South Dakota and a South Dakota Supreme Court case. (Docket 12 at p. 12). The South Dakota Supreme Court case, Christians v. Christians, cites the Restatement (Second) of Judgments for the background rationale of res judicata, but it does not adopt the transaction test. See 637 N.W.2d 377, 387 (S.D. 2001).

         The federal court cases defendant relies on do not apply South Dakota law. In each case, the party invoking res judicata does so based on a prior federal case. See Lane v. Peterson, 899 F.2d 737, 739-42 (8th Cir. 1990); Yankton Sioux Tribe v. U.S. Dep't of Health & Human Servs., 496 F.Supp.2d 1044, 1047-52 (D.S.D. 2007); First Nat'l Bank in Sioux Falls v. First Nat'l Bank S.D., No. CIV. 06-4101, 2008 WL 895931, at *1-4 (D.S.D. Mar. 31, 2008). Those cases apply federal res judicata principles. See Porn v. Nat'l Grange Mut. Ins. Co., 93 F.3d 31, 33-34 (1st Cir. 1996) (“Because the judgment in the first action was rendered by a federal court, the preclusive effect of that judgment in the instant diversity action is governed by federal res judicata principles.”).[2] “This is true whether the first action is based on federal question jurisdiction or on diversity jurisdiction.” Rymer Foods, Inc. v. Morey Fish Co., 116 F.3d 1482, at *4 (7th Cir. 1997) (unpublished opinion); see United States v. Saint Louis Univ., No. 07-CV-0156, 2012 WL 359995, a *2 (S.D. Ill. Feb. 2, 2012) (citing Rymer for this proposition).

         The South Dakota Supreme Court has not adopted the transaction test. As stated above, the court “must make a ‘determination of the precise issues' litigated and decided in the state proceeding [ ] and the issues raised in the ...

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