United States District Court, D. South Dakota, Western Division
JEFFREY L. VIKEN, CHIEF JUDGE.
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).
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.
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.
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.
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 &
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.
COUNT I: BREACH OF CONTRACT
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).
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).
SDCL § 58-11-9.5
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).
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
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).
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.
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
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)).
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)).
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.” 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)).
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).
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.
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.”). “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).
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